ACCOUNTING 

AID  TO 

US  I  NESS  PROFITS 


THE 

ARTHUR  YOUNG 

ACCOUNTING 

COLLECTION 


Graduate  School  of 
Business  Administration 

Library  of  the 

University  of  California 

Los  Angeles 


I 


This  book  is  DUE  on  the  last  date  st   •nr--'  Se'nw 


SOUTHERN    BRANCH 

UNIVERSITY  of  CALIFORNIA 
LIBRARY 

LOS  ANGELES,  CALIF. 


Library 

Graduate  Se>  ol  of  Business  Administration 

0  '  -^raity  of  California 

Los  Angeles  24,  California 


ACCOUNTING 

AS  AN  AID  TO 

BUSINESS  PROFITS 


By  WILLIAM  R.  BASSET 


A.  W.  SHAW  COMPANY 

IGO  NEW 

LONDON 

4004?) 


CHICAGO  NEW  YORK 

LONDON 


COPYRIGHT.  1018,  BY  A.  W.  SHAW  COMPANY 


fHIKTED  Dl  THE  OTTTTED  BTATM  Or  AMXXKM 


Bus.  Admin, 
library 

>25 


a 


PREFACE 

THIS  book  is  not  a  treatise  on  accountancy  but  is  what 
the  title  connotes — an  explanation  of  accounting  and 
cost  accounting  for  the  business  man  and  to  the  end  that 
he  may  use  his  records  to  earn  greater  profits.  It  is  written 
for  the  business  man  who  wants  to  know  how  best  to  manage 
his  business  and  for  the  banker  or  investor  who  is  looking  for 
information  by  which  he  can  understand  the  bookkeeping  of  a 
concern  in  which  he  contemplates  an  investment  to  determine 
if  that  bookkeeping  is  a  mere  collection  of  figures  or  a  real  living 
history. 

The  accounting  of  today  is  very  different  from  that  of  a 
few  years  past;  the  only  accounting  which  the  writer  thinks 
worthy  of  the  name  is  that  which  combines  an  exact  book  record 
of  transactions  with  an  exact  book  record  of  operations  so  that 
causes  as  well  as  effects  may  be  studied.  Accounting  can  be 
and  should  be  constructive  and  not  merely  historical;  it  should 
point  out  wastes  and  lead  to  betterments.  In  short  it  should, 
if  it  is  to  make  for  better  business,  tell  the  owner  or  executive 
every  possible  fact  of  his  affairs. 

The  writer's  procedure  has  been  to  take  first  in  each  chapter 
a  number  of  incidents  drawn  from  an  experience  with  some 
thousands  of  concerns  and  then  to  develop  the  subject  in  a 
practical  way,  giving  the  various  labor-saving  forms  which  have 
been  found  most  efficient,  and  finally  to  show  how  the  actual  en- 
tries should  be  made.  Thus  the  business  man  will  best  grasp 
the  full  import  and  will  not  become  confused  with  the  mere 
terms  of  accounting — with  which  formality  few  business  men 
have  very  much  patience. 

The  incidents  are  drawn  from  many  lines  of  business,  some 
great  and  some  small,  but  there  are  more  incidents  from  large 
than  from  small  business  for  the  simple  reason  that  the  larger 
concerns  have  the  better  accounting.  But  the  principles  illus- 
trated are  universal  and  belong  to  business  in  general. 

Some  reader  may  find  that  his  particular  variety  of  endeavor 
has  not  been  touched  upon  by  name,  and  may  instantly  exclaim, 
"This  is  of  no  use  to  me,  my  business  is  different." 

iii 


PREFACE 

Let  me  say  that  your  business — no  matter  what  it  may  be — 
is  not  different.  And  further,  I  can  confidently  assert  that 
were  it  possible  to  include  examples  and  forms  in  this  volume  to 
cover  every  possible  variety  of  business,  that  this  book  would 
then  be  of  no  more  use  to  you  than  it  now  is.  It  might  be  of 
lesser  utility.  And  for  this  reason:  one  cannot  install  a  system 
of  accounting,  chapter  and  verse,  and  gain  the  best  results. 

Each  business  is  different  in  that  the  conditions  are  never 
quite  alike  and  individual  adaptations  should  be  made  from  the 
universal  principles.  To  make  these  adaptations,  there  must 
be  first  an  understanding  of  the  principles;  and  once  these  are 
understood,  it  is  surprising  how  easy  it  is  to  cut  out  a  system 
which  will  exactly  fit.  Therefore,  if  the  headings  on  a  form 
do  not  happen  to  be  the  headings  which  you  need — study  the 
form  and  discover  the  exact  wording  that  will  best  suit  you. 

The  contents  of  this  book  give  sufficient  information  for  the 
formation  of  an  efficient  cost  and  accounting  system  for  any 
kind  or  variety  of  business.  My  general  plan  has  been  to  detail 
the  elements  of  accounting,  then  to  make  the  practical  applica- 
tions through  the  great  divisions  of  business  such  as  purchase, 
sale,  and  payment,  and  finally  to  elucidate  cost  accounting  in 
principle  and  in  method  and  then  as  applied  to  manufacturing, 
merchandising,  jobbing  and  the  sale  of  personal  services. 

In  every  case  the  practices  recommended  are  the  most 
modern  and  those  which  have  given  the  most  satisfaction  in 
actual  use. 


CONTENTS 

CHAPTER  I 
How  Much  Accounting  You  Really  Need 


Business  by  rule  of  thumb.  Overaccounting.  The  place  of 
accounting.  Fitting  the  system  to  the  work.  Growing  into 
the  system.  Time  taken  in  installation.  A  common  failing. 
Difficulties  in  installation.  What  is  the  best  system?  Basic 
principles  that  clarify.    The  "ready-made"  systems. 

CHAPTER  II 

How  Accountancy  Can  Affect  Your  Profits     ....        10 

What  is  meant  by  "turnover"  and  "profit."  Typical  figures  in 
various  lines.  Guessing  at  profits.  Handling  price-cutting 
methods.  Ignorance  of  costs  encourages  price  cutting.  A  con- 
crete example.  What  his  profits  really  were.  Locating  the 
profitable  business.  Statements  on  a  unit  basis.  Labor  effi- 
ciency. Expense  analysis.  Analyzing  selling  and  freight.  A 
small  item,  but  nevertheless  important.  How  the  deal  might 
have  turned  out.  Planning  the  business  ahead.  Rapid  develop- 
ment demands  plenty  capital. 

CHAPTER  III 
The  Essentials  op  Bookkeeping 25 

Rehearsing  the  primary  principles  of  accounting.  The  single 
entry  system.  What  accounting  should  include.  The  basis  of 
proper  accounting.  The  double  entry  system.  Debit  and 
credit.  Operation  of  double  entry.  The  ledger.  Why  "sub- 
sidiary ledgers"  are  necessary.  Some  modern  changes  in 
method.  The  main  functions  of  the  general  ledger.  The  pass- 
ing of  the  day  book. 

CHAPTER  IV 

Opening  the  Books 38 

Fundamentals  apply  equally  to  small  and  big  business.  The 
necessary  records  at  the  start.  Regarding  the  capital  transac- 
tions.   When  more  money  is  needed. 

vii 


CONTENTS 

CHAPTER  V 

Effective  Purchasing  Methods  and  Records     ....        51 

Hidden  purchasing  losses.  Comparing  two  types  of  buyers. 
Getting  down  to  basic  buying  principles.  What  exact  buying 
knowledge  accomplished.  What  comparative  cost  figures 
showed.  Requisites  of  a  purchasing  system.  Setting  stock 
maxima  and  minima.  Controlling  the  stock  room.  Another 
case  of  expensive  stockkeeping.  Serviceable  stock  records. 
Checking  up  on  the  storeskeeper.  What  shortage  report  should 
show.  Purchasing  department  quotation  lists.  Performance 
records.  Ordering  the  material.  The  purchasing  agent's  follow- 
up.  A  simplified  purchase  order.  Purchasing  supplies.  Re- 
ceiving the  goods.  The  charge  register.  How  the  charge 
register  simplifies  accounting.  The  divisions  of  the  charge 
register.    Control  of  the  charge  register. 

CHAPTER  VI 
Handling  Accounts  Payable 83 


Cooperation  necessary.  Cash  discounts.  The  maturity  file. 
Payment  procedure.  Voucher  checks.  Special  voucher  check 
forms.  Check  protection.  Petty  cash  payments.  The  pay- 
roll. The  manner  of  payment.  How  one  big  payroll  waa 
handled.    The  recording  of  the  payments. 

CHAPTER  VII 
How  Accountancy  Helps  Sales 102 

Profits  require  detail  study.  The  unit  of  sale.  Paying  salesmen 
on  a  commission  basis.  Marketing  divisions.  Commission 
merchants  a  big  factor.  Selling  expense  and  selling  deductions. 
When  is  packing  a  selling  expense?  When  is  breakage  a  selling 
expense?  Giving  credits  and  allowances.  Credit  memoran- 
dum. Sales.  Machine  bookkeeping.  Where  monthly  bills 
are  less  than  a  thousand.  Simplifying  the  making  of  records. 
Cash  sales.  Selling  expenses.  Salesmen's  expenses.  Sales- 
men's commissions. 

CHAPTER  VIII 

Handling  the  Cash 126 

Trade  acceptances.  Collections.  Worthless  and  disputed 
accounts.  A  striking  illustration.  Receipts.  The  collection 
sheet.  Cash  receipts.  The  autograph  system.  Roller  auto- 
graph registers.  Two  kinds  of  collections.  Entering  the 
receipts. 

viii 


CONTENTS 

CHAPTER  IX 

Balancing  the  Books 142 

Why  the  books  were  opened.  Accounting  principles  are  univer- 
sal. Closing  the  books  in  the  old  days.  Modern  closing  of 
accounts.  Do  not  close  too  frequently.  Why  the  book  records 
are  incomplete.  The  inventory.  The  relation  of  the  inventory 
to  profits.  The  question  of  pricing.  Where  experts  disagree. 
When  the  market  is  up.  When  the  price  fluctuates.  Goods  in 
process.  Finished  goods.  Finding  the  profit.  Illustrating 
the  point.    Closing  entries. 

CHAPTER  X 

How  to  Arrive  at  Your  Statement  op  Condition  .     .     .       156 

What  purposes  the  statement  serves.  Neglect  of  statement 
grounds  for  suspicion.  The  form  of  the  statement.  Dividing 
the  assets.  Fixed  assets.  The  depreciation  reserve.  Treasury 
holdings.  Securities  owned.  Sinking  funds.  Current  assets. 
The  reasons  for  petty  cash.  How  accounts  receivable  are  shown. 
Accounts  receivable  in  suspense.  Notes  receivable.  Deferred 
assets.  Prepaid  operating  expenses.  Capital  stock  and  liabili- 
ties. Bonded  indebtedness.  Current  liabilities.  Preserves. 
Contingent  liabilities.    Surplus.    Net  worth. 

CHAPTER  XI 

How  Bankers  Analyze  Your  Statement  of  Condition     .       174 

Two  surveys  of  statements  of  condition.  A  general  rule.  The 
details  of  the  statement.     Competent  audit  adds  value. 

CHAPTER  XII 

What  Is  Good  Will  Really  Worth? 183 

Can  good  will  be  valued?  How  the  courts  protect  good  will. 
The  life  of  good  will.  Determining  the  capitalization  value  of 
good  will.    Placing  good  will  on  the  statement. 

CHAPTER  XIII 

Charging  Off  Depreciation  on  the  Right  Basis     .     .     .       192 

Why  depreciate  equipment?    The  operating  worth.    No  arbi-  • 
trary    percentages.    Emotional    depreciation.    The    basis  for 
depreciation.    Obsolescence.    Plant  ledgers.    Depreciating  old 
installations.     The  depreciation  of  buildings.    Life  of  structural 
types.    Real  estate.    Appreciation. 


CONTENTS 

CHAPTER  XIV 

What  Your  Statement  of  Operation  Means      ....       200 

The  value  of  a  statement  of  operation.  The  derivation  of  the 
statement.  Forms  of  statement.  Gross  sales.  Deductions. 
Cost  of  goods  sold.  Manufacturing  expense.  Depreciation. 
Manufacturing  profit.  Administrative  and  selling  expense. 
Other  income.     Other  deductions. 

CHAPTER  XV 

What  a  Cost  System  Means  to  Your  Business       ....  210 

What  is  cost  accountancy?  Why  exact  costs  are  needed.  Good 
systems  are  not  complicated.  No  one  system.  The  right 
system  can  be  had.  Costs  as  an  aid  to  business.  Choosing  the 
right  system.  Fundamentals  of  cost.  Material.  Labor. 
Expense.  Apportioning  the  expense.  Costs  from  the  state- 
ment of  operation.     Using  cost  figures. 

CHAPTER  XVI 

Keeping  a  Record  of  the  Cost  of  Materials    ....      219 

Forms  of  cost  sheets.  Handling  losses  or  wastes.  Standard- 
izing to  prevent  waste.  Plans  that  reduce  waste.  Charging 
scrap.    Often  salvaging  pays. 

CHAPTER  XVII 
How  to  Figure  the  Cost  of  Labor 232 

Paying  productive  and  non-productive  labor.  Charging  direct 
labor.  Keeping  time.  Non-productive  labor.  The  problem 
of  timekeeping.    Making  the  payroll  talk. 

CHAPTER  XVIII 

How  to  Determine  the  Overhead  Expense 242 

The  divisions  of  expense.  The  fixed  charges.  Departmental 
basis  for  costs.  The  departmental  cost  sheet.  Collecting 
contributory  and  production  expense.  Making  up  the  expense 
analysis.  Analysis  of  power  expense.  Expense  divisions.  The 
separation  of  expense.  Apportioning  the  expense.  False 
methods  of  distribution.  The  pound  or  yard  basis.  Charging 
expense  to  production.  The  productive  hour  method.  Dividing 
into  production  centers.  Methods  of  distributing  expense. 
Choosing  the  right  method.  When  to  use  the  labor  dollar 
method.  When  is  a  machine  economical?  Charging  overhead 
on  material.    Getting  costs  by  standardization. 


CONTENTS 

CHAPTER  XIX 

Determining  the  Selling  Expense 268 

Collecting  the  selling  expense.  Divisions  of  expense.  Rating 
salesmen.  The  place  of  advertising  expense.  The  distribution 
of  expense. 

CHAPTER  XX 

Tying  All  the  Costs  into  the  General  Accounts       .     .       273 

Checking  the  costs  into  the  general  books.  What  manufacturing 
expense  is.  Handling  finished  goods  and  parts  in  process. 
Determining  the  frequency  of  making  statements. 

CHAPTER  XXI 

Accounting  for  the  Man  Who  Sells  Personal  Service  .       280 

Handling  traveling  expenses.  The  place  of  office  burden. 
Handling  dull  and  rush  seasons.     Summarizing  the  charges. 

CHAPTER  XXII 

Accounting  for  the  Retailer 285 

Determining  the  basis  of  merchandising  costs.  What  is  a 
department?  The  reasons  for  frequent  turnovers.  The  funda- 
mental books  to  keep.  Purchasing  for  the  retailer.  The  charge 
register.  Making  the  sales  records.  Handling  returns.  Han- 
dling cash  receipts  and  disbursements.  Gathering  daily  sales 
totals.  Marking  up  and  marking  down.  Entering  charge 
accounts.  Distributing  expense.  Apportioning  the  fixed 
charges.  Charging  deliveries  into  expense.  Determining 
departmental  expense.    Handling  general  bookkeeping. 

CHAPTER  XXIII 

Accounting  for  the  Jobber 305 

The  functions  of  a  jobber.  The  jobber  as  a  distributor.  The 
jobber  as  a  banker.  The  principal  jobbing  expenses.  The 
importance  of  accounting  to  the  jobber. 

CHAPTER  XXIV 

Control  Reports  for  the  Executive 307 

How  closely  should  an  executive  supervise  details?  How  much 
should  he  rely  on  subordinates?  The  minimum  of  reports  for 
the  executive.  No  business  too  large  or  too  small  for  central 
reports.  The  graphic  representations  of  accounts.  The  value 
of  graphs.    When  symbols  can  be  used. 


CHAPTER  I 

HOW  MUCH  ACCOUNTING  YOU  REALLY  NEED 

ACCOUNTING  may  be  defined  in  a   general  way  as   the 

AA    record  of  a  business  and  is  thus  distinguished  from  book- 

**•  *•*  keeping,  which  may  be  called  a  record  of  transactions. 

Accounting  cannot  exist  without  bookkeeping,  but  it  is 
possible  for  bookkeeping  to  be  present  without  any  proper  degree 
of  accounting — without  a  system  of  larger  record  which  coordi- 
nates the  business  factors  so  that  the  result  can  really  be  called 
a  true  record  of  the  business.  Sound  bookkeeping  is  the  basis 
of  sound  accounting. 

Sound  bookkeeping  is  not  merely  elaborate  bookkeeping — 
it  is  the  opening  of  the  right  accounts  for  the  particular  business 
and  the  making  of  the  entries  in  these  accounts. 

It  is  perfectly  feasible  to  conduct  a  successful  business  with 
but  the  most  meager  of  accounts.  Many  men  have  left  large 
fortunes  derived  from  enterprises  which  never  owned  more  than 
a  single  book.     But  those  men  lived  yesterday — not  today. 

Business  by  Rule  of  Thumb.  I  recall  one  rather  large 
lumber  operator  who  had  the  simplified — almost  the  foolish — 
system  of  keeping  his  records.  They  reposed  in  the  breast  pocket 
of  his  coat;  he  explained  the  system  to  me:  "This,"  said  he, 
fishing  out  an  envelop  covered  with  figures,  "is  what  is  coming 
to  me,  and  these,"  taking  out  a  wad  of  bills,  "are  what  I  owe. 
I  just  add  my  bank  balance  to  what  is  coming  to  me  and  I  deduct 
from  it  what  I  owe.  I  know  just  where  I  stand.  What  do  I 
want  with  accounting?" 

Did  he  know  where  he  stood?  He  had  no  method  of  fixing 
the  price  of  his  lumber  or  of  detecting  whether  or  not  he  was 
losing  money,  until  the  money  had  actually  been  lost.  He  cut 
the  timber  from  the  virgin  forests,  sold  it  at  the  market  price, 
paid  his  labor  and  other  bills  and  went  on  contentedly. 

He  could  manage  to  exist  without  accounts  because  he  had 
a  business  which  was  comparatively  simple  in  itself  and  in  which 


2  BUSINESS  ACCOUNTANCY 

the  price  was  fixed  by  outside  conditions.  The  market  gave 
him  a  margin  of  profit;  but,  had  the  market  fallen,  he  would  not 
have  known  how  to  trim  himself  to  make  money  under  the 
new  conditions. 

Such  men  undoubtedly  can  get  on  in  some  fashion  or  other 
without  real  accounting.  We  know  that  because  they  do — 
and  we  also  know  that  they  are  not  safe  risks.  They  will  usually 
be  found  to  have  a  geographical  or  industrial  situation  where 
there  is  little  or  no  competition.  They  cannot  exist  in  keen, 
competitive  times,  nor  can  they  be  regarded  as  types  for  any 
man  to  follow;  they  have  succeeded  because  natural  conditions 
were  so  favorable  that  they  could  not  fail  unless  by  extraordinary 
perversity.    They  succeed  in  spite  of  their  methods. 

Overaccounting.  On  the  other  hand  it  is  undoubtedly 
true  that  not  a  few  men  have  failed  who  have  specialized  in  the 
accuracy  of  their  accounts — have  miserably  failed.  They  have 
known  every  single  fact  about  the  business  excepting  one — the 
how  of  making  money. 

Overaccounting  is  usually  caused  by  fitting  a  number  10 
system  on  a  number  3  business  or  by  striving  for  too  elaborate 
a  summary  of  unimportant  detail.  The  cost  system  of  the 
United  States  Steel  Corporation  or  of  a  great  automobile  factory 
cannot  in  its  entirety  be  superimposed  on  a  business  with  a 
gross  of  fifteen  thousand  a  year — nor  of  a  hundred  thousand  a 
year  for  that  matter.  The  point  where  it  is  more  expensive  to 
save  than  to  lose  a  penny  depends  upon  the  number  of  times 
that  penny  or  its  fellows  figures  in  an  operation. 

The  principles  of  good  accounting  do  not  vary,  but  their 
application  must  be  tempered  by  common  sense  and  the  exigencies 
of  the  situation.  The  accounting  should  give  useful,  business- 
guiding  results  and  not  results  which  are  only  curiosities. 

Overaccounting  is  waste.  A  great  insurance  company  put 
in  a  new  system  of  records  at  a  cost  of  several  hundred  thousands 
of  dollars;  the  design  was  to  inform  of  every  fact,  comparison, 
and  percentage.  They  got  reams  of  statistics  but,  in  a  few 
months,  the  executives  awoke  to  the  fact  that  the  new  system 
did  not  more  accurately  determine  the  vital  points  than  had  the 
old — and  it  used  twice  as  many  clerks.  I  know  a  concern  which 
adopted  a  system  that  involved  the  use  of  70  clerks  where  30 
had  before  been  ample  and  yet  these  70  clerks  failed  absolutely 
to  give  accurately  the  critical  figures. 


FITTING  IT  TO  YOUR  BUSINESS  3 

A  big  manufacturing  company  in  the  East  some  10  years  ago 
determined  to  attain  an  exact  record  of  costs  in  every  step  in 
every  department.  This  was,  in  itself,  a  commendable  inten- 
tion and  could  have  been  made  the  basis  of  greater  profit  through 
the  revealed  possibilities  of  economy.  But  the  cost  system 
was  not  tempered  with  common  sense,  it  was  refined  to  such 
a  degree  and  took  so  many  employees  that  the  former  profits 
of  the  concern  were  entirely  absorbed  in  the  cost  finding.  These 
are  all  extreme  cases,  but  they  go  to  show  that  good  accounting 
is  never  unreasonable. 

The  Place  of  Accounting.  In  none  of  the  cases  above  was 
success  due  to  lack  of  accounting,  or  was  failure  due  to  the 
presence  of  accounting.  Those  who  succeeded  in  spite  of  their 
methods  will  be  among  the  first  to  fail  when  competition  strikes. 
Those  who  apparently  had  too  much  accounting  really  had  no 
accounting  at  all — only  an  abundance  of  figures. 

But  what  is  accounting  and  what  will  it  do  for  a  business — 
for  my  business? 

Accounting  is  the  assembling  of  the  record  of  the  business 
in  such  form  that  comparisons  may  be  made  and  errors  or  wastes 
detected.  It  will  show  up  true  conditions,  take  the  mystery 
out  of  profits  and,  by  study,  permit  the  intelligent  devising  of 
ways  and  means  for  greater  profits. 

It  will  not  act  as  the  motive  power  of  a  business  nor  will  it 
supply  a  deficiency  in  ordinary  business  acumen.  Accounts 
are  the  gage  and  not  the  motor  of  business.  An  exact  record  of 
deeds  will  not  substitute  for  the  deeds  any  more  than  will  a  good 
intention  substitute  for  an  accomplished  act. 

Accounts  are  useful  only  as  they  are  a  record  of  business, 
and  used  thus  will  permit  intelligent  progress  to  be  made  upon 
a  foundation  of  fact.  They  will  check  errors,  but  they  will 
not  automatically  promote  business.  They  will,  however,  enable 
any  concern  to  know  its  strength  and  its  weakness  and  thus  to 
build  on  a  sure  ground  of  profit. 

That  is  the  function  of  accounting  and  as  such  it  is  an  insep- 
arable aid  to  business  profits  and  business  building. 

The  progress  of  a  business  without  true  accounts  as  compared 
with  one  which  has  true  accounts  is  as  the  man  groping  in  a 
dark  room  to  the  man  who  walks  in  a  room  flooded  with  sunlight. 

Fitting  the  System  to  the  Work.  There  are  no  universal 
Bystems.     I  am  rather  of  the  belief  that  no  system  at  all  is  better 


4  BUSINESS  ACCOUNTANCY 

than  a  system  which  is  not  fitted  to  the  work  in  hand.  It  is 
better  not  to  know  at  all  than  to  have  false  information.  The 
business  which  has  no  worth-while  accounting  will  receive  its 
warning  signals  from  the  outside — it  will  be  discovered  that 
"something  is  wrong"  and  a  search  will  be  made  for  the  trouble; 
but  if  the  business  has  supposedly  infallible  accounting  which  is 
really  not  fitted  to  its  needs,  then  the  results  and  not  the  outside 
warnings  will  alone  be  heeded — and  then  it  may  be  too  late. 

But  the  business  which  has  its  accounting  on  a  firm  basis — 
on  both  the  commercial  and  the  cost  sides — is  on  a  sure  founda- 
tion. If  profits  are  not  right,  the  cause  can  instantly  be  found 
and  the  remedy  devised.  It  is  never  necessary  to  make  a  specu- 
lative diagnosis  when  the  exact  record  of  the  business  is  unfolded. 
The  weak  points  reveal  themselves  almost  to  the  casual  observer. 
No  business  can  be  considered  as  sound  which  does  not  know 
where,  how,  and  why  it  makes  a  profit.  Therefore,  although 
proper  accounting  will  not  substitute  for  business  brains,  it 
will  help  mediocre  brains  into  a  higher  class  and  will  show  the 
fine  brains  previously  unknown  avenues  of  progress. 

The  system  of  accounting  adopted  must  be  devised  to  suit 
the  needs  of  the  business.  That  is  step  one.  Step  two  is  almost 
equally  important;  it  is  gently  to  fit  the  new  procedure  on  the 
established  business. 

Growing  into  the  System.  Systems  of  accounting  are  not 
often  "put  in."  The  best  system  in  the  world — the  exact  sys- 
tem which  the  particular  business  requires — may  lose  all  its 
efficacy  by  being  suddenly  thrust  upon  the  office.  Clerks  can- 
not change  overnight  from  one  system  to  another;  they  will  not 
take  in  at  once  all  the  features  of  a  new  installation.  That  which 
was  designed  to  avoid  confusion  may  cause  infinite  confusion. 

Let  me  warn  against  undue  enthusiasm  over  good  accounting 
and  the  instant  desire  to  change  everything  forthwith.  Much 
excellent  accounting  work  has  been  lost  because  of  the  shock  of 
impact  upon  the  office  force. 

Even  where  conditions  are  such  that  quite  extensive  changes 
might  be  physically  feasible,  the  personal  element  may  stand  in 
the  way.  The  personal  equation  is  to  be  considered  in  the 
speed  of  the  installation  of  new  systems.  Trusted  employees 
may  resent  6udden  orders  which  they  do  not  understand,  but 
they  will  likely  take  sympathetically  to  gradual  changes  which 
are  made  after  consultation  with  them. 


FITTING  IT  TO  YOUR  BUSINESS  5 

The  human  elements  are  not  to  be  neglected  by  the  wise 
owner  and  it  makes  no  difference  whether  the  human  element  is 
personified  by  one  bookkeeper  or  by  a  staff  of  a  hundred;  in 
fact,  one  man  may  protest  more  vigorously  than  a  hundred. 

Putting  aside  the  personal  equation  as  a  matter  to  be  decided 
by  the  man  on  the  spot,  the  size  and  the  character  of  a  business 
will  determine  the  rapidity  with  which  new  methods  should  be 
adopted. 

In  the  case  of  an  established  business  a  comprehensive  method 
can  be  planned  at  the  outset,  but  the  steps  of  introduction  should 
be  taken  one  by  one  and  only  after  each  step  is  thoroughly  safe. 
In  a  few  cases  the  new  system  can  go  in  at  once;  in  the  average 
case  from  nine  months  to  a  year  will  be  necessary,  while  the 
very  large  business  will  require  two,  three,  or  more  years. 

Time  Taken  in  Installation.  To  illustrate — a  simple  case 
in  which  the  complete  installation  was  finished  in  nine  days: 
The  owner  of  a  retail  coal  business  which  sold  about  40,000  tons 
a  year  had  discovered  that  he  was  guessing  at  his  profits  through 
most  of  the  year.  He  had  a  large  number  of  small  accounts 
totaling  some  10,000  tons  which  were  paid  on  the  one-  or  two- 
dollar-a-week  plan;  each  of  these  accounts  was  contained  on  a 
card  and  the  daily  payments  and  disbursements  were  entered  in 
a  cash  book  by  him. 

The  system  was  essentially  single  entry,  for  he  was  without 
a  method  of  proving  the  accuracy  of  the  results,  except  that 
twice  a  year  he  took  an  inventory  and  from  the  results  of  that 
inventory  he  decided  what  his  profit  had  been  for  the  previous 
six  months.  He  always  had  to  wait  six  months  to  know  where 
he  stood — and  six  months  is  a  long  time  to  travel  on  guesswork 
in  the  modern  business  world. 

The  new  installation  was  very  simple;  instead  of  the  cards 
and  the  cash  journal,  we  substituted  a  daily  sheet  typed  by  a 
girl  in  two  hours.  (The  handwritten  entries  had  taken  four 
hours.)  The  sheet  with  the  tonnage  of  sales  was  posted  to  a 
ledger  account  where  it  met  the  previously  posted  record  of 
tons  purchased.  But  taking  off  the  ledger  a  statement  of  coal 
remaining  on  hand  would  not  have  been  accurate  because  stored 
coal  shrinks  in  tonnage ;  the  subtraction  of  the  coal  sold  from  the 
coal  purchased  would  not  have  given  the  tonnage  in  the  yard. 

By  a  series  of  experiments  we  found  that  40,000  tons  shrunk 
about  600  tons  while  stored,  which  gave  a  figure  of  about  5  cents 


6  BUSINESS  ACCOUNTANCY 

a  ton  to  be  added  to  the  cost  of  the  coal  sold,  to  determine  the 
value  of  the  remaining  contents  of  the  bunkers  from  the  ledger. 
A  careful  study  was  made  of  the  selling  expense,  an  important 
part  of  which  was  the  depreciation  and  upkeep  of  the  delivery 
automobiles;  and  thereby  the  overhead  was  determined.  (The 
definition  of  all  these  various  accounts  will  be  found  in  detail  in 
the  subsequent  portions  of  this  volume.)  By  knowing  these 
factors  it  was  possible  to  determine  at  the  end  of  each  month 
the  exact  profit  for  that  month  and  to  discover  many  of  the 
operating  mistakes  that  had  been  made. 

A  Common  Failing.  The  owner,  and  this  illustrates  a 
common  failing,  became  so  enamored  of  his  cost  system  that 
he  wanted  it  further  developed  so  that  his  exact  standing  and 
profit  at  the  end  of  each  business  day  could  be  had.  But  his 
business  did  not  require  such  minute  accounting  and  the  proper 
calculation  for  daily  balances  would  have  required  the  services 
of  at  least  two  more  bookkeepers  in  addition  to  the  two  who  were 
already  employed.  He  was  dissuaded  from  the  adventure  in 
overaccounting. 

It  was  discovered  that  the  profit  was  $2  a  ton  gross  and  SI 
net.  He  had  previously  been  under  the  impression  that  his 
profits  were  much  lower.  Both  the  owner  and  the  clerks  were 
in  complete  sympathy  with  the  new  methods  and  the  time  con- 
sumed in  installing  was  only  that  necessary  to  complete  esti- 
mates of  coal  shrinkage  and  to  train  the  bookkeepers. 

Difficulties  in  Installation.  A  fair-sized  gas-making  plant 
offers  an  example  of  the  middle  class  of  difficulty.  The  general 
character  of  the  bookkeeping  of  a  public  service  corporation  in 
most  states  is  regulated  by  commission  and  therefore  certain 
phases  could  not  be  touched.  The  principal  object  was  more 
accurately  to  determine  costs.  These  are  of  particular  import 
in  a  gas  plant,  for  the  gas  itself,  although  supposedly  the  main 
product,  is  not  the  source  of  the  greatest  revenue;  that  is  found 
in  the  by-products — coke,  ammonia,  and  so  on. 

The  first  step  here  was  the  installation  of  a  voucher  register 
which  was  a  combination  ledger  and  distribution  journal.  Then 
the  organization  of  the  office  records  was  gradually  completed 
and  a  start  made  on  the  manufacturing  cost  system,  first  oq  the 
gas  and  later  on  the  by-products.  At  the  end  of  nine  months 
the  new  system  was  all  in  with  the  unqualified  approval  of  the 
managers,  clerical  force,  and  foremen. 


FITTING  IT  TO  YOUR  BUSINESS  7 

In  a  large  chemical  house,  the  bookkeeping  methods  have 
been  in  process  of  reorganization  through  several  years  without 
having  yet  been  completed  and  also  without  the  loss  of  any  time 
that  might  have  been  saved.  This  concern  has  five  plants  in 
different  parts  of  the  country,  branch  selling  offices  in  most  of 
the  large  cities,  and  numerous  additional  selling  agencies. 

The  old  system  of  accounting  had  not  given  the  right  dis- 
tribution of  expenses;  throughout  the  whole  organization,  the 
selling,  the  administrative,  and  many  of  the  manufacturing 
expenses  were  improperly  merged.  It  was  impossible  to  make 
a  sweeping  change  which  the  thousands  of  clerks  could  imme- 
diately comprehend,  or  indeed  to  plan  any  radical  change  and 
execute  it  without  a  fear  that  some  mistakes  had  been  made  in 
the  design — the  operation  was  so  big. 

The  desire  behind  the  changes  was  to  bring  the  accounts 
of  all  branches  to  control  at  the  central  office  where  the  execu- 
tives might  have  constant  and  comprehensive  knowledge  of  the 
whole  business.  Instead  of  beginning  at  the  central  office,  only 
a  few  changes  were  made  there  at  the  outset  and  the  attention 
was  given  to  the  branches,  each,  in  turn,  being  gradually  re- 
vamped. Thus  when  the  final  improvements  were  made  in 
the  home  office,  the  branch  offices  had  already  become  thoroughly 
accustomed  to  the  new  order. 

Unless  you  have  your  business  well  in  hand  and  it  is  com- 
paratively small,  do  not  "put  in"  anew  system — instead,  plan 
your  new  system  as  a  whole,  but  adopt  it,  bit  by  bit,  preferably 
after  conference  with  your  employees. 

What  Is  the  Best  System?  Just  as  the  best  accounting 
will  be  the  result  of  a  development  in  its  installation,  so  the  new 
business  will  find  that  it  cannot  adopt  all  of  any  system  at  the 
very  beginning  of  its  career.  Otherwise  it  may  be  found  that 
the  dealings  are  being  shaped  to  the  system  instead  of  the  system 
to  the  dealings.    There  are  examples  of  this  all  about  us. 

It  may  be  given  as  a  general  principle  that  the  best  system 
of  accounting  is  that  which  will  give  the  most  accurate  results 
with  the  least  clerical  work.  Good  accounting  is  not  necessarily 
complex.  More  than  likely  the  reverse  will  be  true.  One  must 
be  on  one's  guard  against  the  seductiveness  of  elaborate  account- 
ing.   I  have  already  urged  this  point. 

Because  business  is  multifarious,  accounting  is  multifarious, 
and  the  number  of  good  systems  is  limited  only  by  the  conditions 


8  BUSINESS  ACCOUNTANCY 

and  kind  of  the  business.  It  is  the  same  with  cost  systems. 
There  is  no  sample  stock  from  which  an  exact  system  may  be 
picked ;  accounting  and  costs  systems  are  made  to  order  and  not 
ready-made  affairs — if  a  respectable  fit  is  to  be  hoped  for. 

Basic  Principles  that  Clarify.  Running  through  all 
proper  systems  of  accounting  are  certain  basic  principles.  The 
understanding  of  these  principles  will  enable  the  adoption  of  the 
needed  elaboration  of  accounting  both  at  the  beginning  of  the 
business  and  from  time  to  time  as  the  business  develops.  And 
an  understanding  of  principles  will  take  away  much  of  the 
mystery  which  too  often  surrounds  the  books.  An  "intelligent 
record"  and  a  "comprehensible  record"  should  be  synonymous. 

But  because  accounting  methods  must  be  made  to  fit  a  par- 
ticular business,  do  not  imagine  that  the  principles  vary.  The 
principles  are  unchanging.  From  this  book  any  man  should  be 
able  to  pick  out  something  that  suits  him. 

It  is  a  common  error  for  the  retailer  with  a  small  house  and 
a  single  bookkeeper  to  declare:  "Oh,  that  is  all  well  enough,  but 
I  am  not  big  enough  for  those  things. " 

I  have  heard  this  condemnation  of  an  excellent  system 
because  the  writer  mentioned  a  "purchasing  department"  and 
the  speaker  had  not  an  establishment  of  sufficient  size  to  warrant 
a  purchasing  agent.  He  did  not  see  that  "purchasing  depart- 
ment" was  but  a  term  of  convenience  and  that  the  maxims  of 
purchasing  given  would  hold  for  any  man  who  bought — that 
the  book  was  talking  about  the  science  of  purchasing  and  not  of 
mere  departmental  division. 

Throughout  this  book  most  of  the  examples  are  taken  from 
fairly  large  and  representative  rather  than  from  small  businesses, 
but  the  selection  is  thus  made  only  because  the  larger  business 
commonly  has  better  accounting  methods  than  the  smaller.  The 
greatest  lessons  for  the  small  business  are  to  be  taken  from  suc- 
cessful enterprise,  and  successful  enterprise  cannot  long  be 
small.  One  does  not  seek  a  teacher  among  those  who  know 
less  than  oneself  about  a  subject.  The  real  instruction  is  to  be 
found  among  those  who  have  met  and  conquered  the  prob- 
lems which  we  may  now  be  facing. 

The  '  'Ready-Made"  Systems.  Again,  no  man  should  seek 
a  ready-made  system  of  accounts  and  adopt  it  by  rule  rather  than 
by  reason;  any  business  man  can  master  the  science  of  his 
accounts.    He  may  not  care  actually  to  make  the  entries  nor 


PITTING  IT  TO  YOUR  BUSINESS  9 

even  to  be  able  to  make  them,  but  he  should  know  the  why  of 
every  detail;  otherwise  he  cannot  exercise  that  control  over  the 
accounting  which  an  executive  must  have. 

Therefore,  do  not  seek  a  form  which  will  just  about  fill  your 
bill;  find  out  the  reason  behind  the  form,  and  then  design  one 
which  will  exactly  suit  you.    It  is  not  hard  to  do. 

This  book,  of  necessity,  starts  at  the  very  beginning  of  the 
subject  of  accounting,  and  the  opening  chapters  deal  with  simple 
elementary  bookkeeping.  Many  readers  will  not  be  interested 
in  this  primary  matter,  but  in  order  to  make  a  cohesive  whole 
it  is  necessary  to  assume  that  the  reader  begins  without  the 
slightest  knowledge  of  either  bookkeeping  or  accounting.  Then 
we  proceed,  step  by  step,  to  the  more  advanced  practice. 

In  every  case  the  incidents  and  examples  which  are  given  are 
taken  from  the  experience  of  the  writer.  For  obvious  reasons, 
the  names  of  the  firms  from  whose  history  the  examples  are 
cited  are  not  given  in  the  text. 


CHAPTER  II 

HOW  ACCOUNTANCY  CAN  AFFECT 
YOUR  PROFITS 

I  HAVE  endeavored  to  impress  in  the  preceding  chapter  that 
accountancy  is  not  the  motive  force  of  a  business — it  will 
not  create  business — and  it  cannot  be  too  strongly  empha- 
sized that  good  accountancy  (in  which  is  included  a  thorough 
and  comprehensive  cost  system)  will  never  supply  the  lack  of 
ordinary  business  acumen. 

How,  then,  if  it  will  not  promote  business,  will  it  aid  profits? 

The  business  man  is  very  properly  not  interested  in  any 
study  of  business  which  will  not  directly  or  indirectly  contribute 
to  the  success  of  his  own  commercial  activities,  and  the  ordinary 
expression  of  success  in  commerce  is  summed  up  in  the  word 
"profit."  A  proper  system  of  accountancy  and  cost  will  deter- 
mine how  and  where  profits  or  losses  occur,  and  thus,  by  taking 
the  proceedings  out  of  the  dark  and  into  the  light,  permit  a 
study  which  will  lead  to  a  further  strengthening  of  the  strong 
points  and  to  a  bolstering  up  of  the  weak  points. 

That  is  the  function  of  accountancy  and  any  system  which 
does  not  eventually  produce  such  an  exhibition  is  bad.  If  the 
basis  of  profit  is  known,  then  the  profit  itself  may  be  studied  in 
an  exact,  scientific  manner. 

The  Federal  Trade  Commission,  in  almost  its  initial  study, 
found  that  fully  100,000  American  corporations  were  running  at 
an  annual  loss,  because  they  did  not  have  proper  methods  of 
accounting  and  cost  finding,  and  that  of  250,000  corporations 
engaged  in  trade  and  industry  in  the  United  States,  scarcely 
one  quarter  were  making  profits  of  $5,000  a  year  or  more. 

What   Is   Meant   by  "Turnover"  and  "Profit."     The 

question  as  to  what  constitutes  a  fair  and  proper  margin  of 
profit  on  sales  is  one  which  cannot  be  answered  dogmatically, 
for  necessarily  it  varies  with  the  nature  of  the  business  under 

10 


THE  EFFECT  ON  PROFITS  11 

consideration.  However,  certain  fundamental  conditions  gov- 
ern a  discussion  of  the  adequacy  of  return  upon  capital  invested. 

The  frequency  or  rate  of  "turnover"  in  either  manufacturing 
or  merchandising  is  an  important  factor  in  determining  the 
margin  of  profit,  but  it  is  not  all-controlling.  By  "rate  of  turn- 
over" is  generally  meant  simply  the  activity  of  that  portion  of 
the  capital  invested  which  is  contained  in  the  value  of  the 
inventory. 

This  represents  but  a  part  of  the  enterprise's  assets  and  not 
the  entire  wealth  or  resources  engaged  in  the  given  business. 
It  is  necessary,  therefore,  to  go  beyond  the  rate  of  turnover  and 
to  consider  the  relation  which  gross  sales  bear  to  capital  invest- 
ment in  a  well-conducted  and  normal  manufacturing  business. 

Typical  Figures  in  Various  Lines.  To  illustrate  the  point 
the  following  tabulations  have  been  prepared  from  available 
statistics  which  indicate  for  various  industries — first,  the  margin 
of  profit  on  sales;  second,  the  ratio  of  gross  sales  to  capital 
investment;  and,  third,  the  equivalent  of  the  profit  expressed  in 
rate  of  return  on  the  capital. 

The  figures  do  not  express  an  ideal  or  a  standard,  but  merely 
the  average  condition  found  in  the  cases  examined: 

Agricultural  implements 10.5%  0.57  6.0% 

Automobiles 9.9%  1.44  14.3% 

Boots  and  shoes 5.9%  2.30  13.8% 

Canning  and  preserves 9.0%  1 .32  12.0% 

Cement 14.0%  0.34  4.8% 

Cotton  goods 6.5%  0.76  4.9% 

Electrical  machinery 11.7%  0.84  9.8% 

Foundry  and  machine  shop 11 . 4%  0 .  83  9 . 5% 

Leather 6.1%  0.99  6.0% 

Paint  and  varnish 12.1%  1.20  14.6% 

Paper  and  wood  pulp 9.1%  0.65  5.9% 

Pottery  and  terra  cotta 12.4%  0.54  6.7% 

Woolen  and  worsted  goods 5.8%  1.05  6.1% 

In  reality,  instead  of  considering,  in  fixing  the  rate  of  turn- 
over, merely  that  part  of  the  capital  expended  in  inventory,  the 
whole  capital  investment  is  placed  in  relation  to  sales,  and  it 
is  found  that  the  rate  of  turnover  then  varies  from  as  low  as 
0.34  in  the  case  of  cement  manufacture  to  2.3  in  the  case  of  the 
boot  and  shoe  industry. 

The  rate  of  turnover  in  retail  merchandising  is  better  un- 
derstood than  in  manufacturing.     Certain  rates  which  may  be 


12  BUSINESS  ACCOUNTANCY 

termed  standard  have  been  compiled  by  the  Bureau  of  Business 
Standards  of  the  A.  W.  Shaw  Company,  and  are  as  follows: 

Type  of  Store*  Average  number  of  turnovers  obtained  annually 

Grocery 10 

Department 7 

Variety  goods 6 

Drug 4.5 

Dry  goods 4 

Hardware 3.5 

Furniture 3 

Shoe 2.1 

Clothing 2 

Jewelry 1.5 

From  the  books  of  several  hundred  stores  carrying  depart- 
mentalized stocks,  averages  for  12  standard  lines  were  obtained 
as  shown  below : 

Line**  Average  number  of  turnovers  obtained  annually 

Notions 9 

Corsets 8 

Women's  ready-to-wear 6 

Wall  paper 4.2 

Men's  furnishings 4.2 

Underwear 4.1 

Hosiery 4 

Gloves 3.5 

Dress  goods 3.2 

Silks 3.1 

Domestics 3 

Carpets 1.5 

Naturally  any  question  of  legitimate  or  required  profit  on 
sales  must  involve  a  consideration  of  the  rate  of  turnover  of  the 
entire  capital;  for,  in  eventual  analysis,  profit  expressed  as  rate 
of  return  on  capital  is  the  controlling  consideration. 

Guessing  at  Profits.  To  express  profit  properly  does  not 
require,  in  most  cases,  elaborate  accounting  or  cost  systems,  but 
it  does  require  a  coordination  in  accounting  which  will  insure 
that  the  result  really  denotes  profit.  Such  a  statement  seems 
almost  puerile,  and  so  it  would  be  were  it  not  that  only  a  trifling 


*The  turnovers  are  for  the  complete  stocks  and  have  no  reference  to  either 
the  character  or  the  number  of  lines  carried. 

**These  average  turnovers  are  for  typical  lines  and  bear  no  relation  to  the 
turns  normally  obtained  through  complete  store  stocks. 


THE  EFFECT  ON  PROFITS  13 

percentage  of  our  business  men  know  their  profits  with  exact- 
ness. It  is  not  too  much  to  say  that  keen,  competitive  com- 
merce cannot  be  carried  on  without  an  exact  knowledge  of  profits 
— not  merely  of  gross  profits,  but  of  the  profit  on  each  article 
sold  and  of  the  profit  on  each  manner  of  sale. 

The  problem  of  profits  runs  quickly  into  cost  accounting; 
an  accurate  set  of  books  quickly  breeds,  and  in  fact  is  not  com- 
plete without,  an  equally  comprehensive  system  of  cost  finding. 
Particularly  is  this  the  case  in  any  fine  of  business  where  the 
profits  have,  been  abnormal  and  then  competition  has  brought 
in  an  era  of  price  cutting.  Such  was  the  situation  not  long  since 
in  one  of  the  most  important  manufacturing  industries  in  this 
country.    It  was  afflicted  with  the  price-cutting  fever. 

Up  to  four  or  five  years  ago  the  industry  as  a  whole  had 
shown  comfortable  profits,  despite  slack  manufacturing  methods. 
A  very  small  amount  of  capital  was  necessary  to  equip  a  plant, 
and  the  profits  were  so  alluring  that  the  field  became  crowded. 

In  a  short  while  the  profits  dropped  to  little  or  nothing. 
The  more  progressive  firms  pulled  in  their  slack  and  managed 
to  survive.  The  others  went  to  the  wall.  The  price  cutting 
continued  with  but  slightly  abated  zeal. 

Handling  Price-Cutting  Methods.  The  manufacturers 
formed  an  association  to  further  the  interests  of  the  industry, 
and  the  price-cutting  evil  came  up  for  discussion  at  almost 
every  meeting.  With  the  elimination  of  the  weaker  firms  there 
was  indication  that  sufficient  demand  had  been  created  by  the 
reduction  of  prices  from  the  old  false  level  to  keep  the  plants 
going  at  reasonably  remunerative  figures. 

The  various  members  of  the  association  appreciated  the  vital 
need  of  close  cooperation,  and  many  plans  for  working  together 
were  talked  over  and  tried.  All  the  plans  fell  through,  however, 
because  all  were  completely  ignorant  of  costs. 

Several  of  the  plants  had  tried  out  cost  systems,  but  in 
every  case  they  had  unfortunately  picked  incompetent  cost 
accountants  and  had  thus  gained  no  tangible  results. 

One  plant,  the  largest,  had  made  two  essays  at  accurate 
costs.  The  first  attempt  was  by  outside  talent  and  the  costs — 
largely  a  compilation  of  arbitrarily  picked  figures — showed  that 
a  profit  was  being  secured  on  every  article.  The  "profit  and 
loss  account"  at  the  end  of  the  year  demonstrated  this  to  be 
not  only  false  reasoning  but  ridiculous  as  well. 


14  BUSINESS  ACCOUNTANCY 

Another  attempt,  made  by  their  own  people,  had  exactly 
the  opposite  result — they  apparently  lost  money  on  everything 
they  made.  This  again  was  out  of  the  question,  as  they  would 
have  been  bankrupt  in  a  few  years  on  the  basis  of  the  figures 
shown,  instead  of  which  they  were  just  "getting  by."  It  was 
apparent  that  it  was  necessary  to  get  on  a  sound  basis  at  once. 

Ignorance  of  Costs  Encourages  Price  Cutting.  The  other 
members,  although  likewise  unfortunate  in  their  experience  with 
cost  systems,  saw  the  importance  of  getting  some  idea  of  pro- 
duction costs,  but  as  they  lacked  dependable  information  of  the 
various  elements  that  entered  into  the  final  cost  of  their  goods, 
the  price  cutting  proceeded  merrily. 

For  instance,  A  would  estimate  that  a  certain  article  cost 
him  $4.50,  and  would  quote  on  that  basis.  B  would  hear  of  this 
quotation  and  immediately  figure  that  if  it  cost  A  $4.50  with 
his  big  office  force,  he  (B)  could  make  it  for  $4.25.  Then  C 
would  opine  that  if  B  could  make  it  for  $4.25,  with  the  big  salaries 
B  paid  his  executives,  he  could  make  it  for  $4.10.  Then  D  con- 
ceived that  he  could  make  it  for  $4  because  C  had  such  a  large 
advertising  expense.  And  finally  E,  who  had  a  small  factory 
and  acted  as  superintendent  and  foreman  of  all  departments, 
became  sure  that  he  could  sell  at  $3.85.  A,  who  originally  figured 
his  cost  at  $4.50,  now  believed  that  with  his  big  production  and 
efficiently  run  factory  he  could  go  to  $3.75  if  E  could  make 
them  at  $3.85. 

In  order  to  revive  an  interest  in  dependable  costs,  the  asso- 
ciation had  each  member  submit  his  own  estimate  of  the  costs 
of  the  elements  in  one  article  which  was  made  by  all. 

The  result  was  astounding.  It  showed  a  variation  from  the 
highest  to  the  lowest  of  about  25%  of  the  average  cost.  And 
this  with  labor  cost — which  had  been  set  by  the  union — exactly 
the  same! 

The  big  plant  took  immediate  action.  A  report  was  made 
for  them  by  outsiders  suggesting  a  simple  cost  method.  The 
report  was  accepted  and  work  of  installation  begun  at  once.  In 
four  months  final  costs  were  made  up — not  entirely  accurate,  of 
course,  for  the  period  during  which  the  cost  data  was  collected 
was  too  short  to  give  dependable  averages — but  sufficiently  near 
the  truth  to  convince  the  management  that  they  had  something 
that  would  eventually  give  them  usable  records  on  which  to  base 
their  selling  prices. 


THE  EFFECT  ON  PROFITS  15 

The  more  progressive  members  of  the  association  soon  fell 
into  line,  and  now  uniform  cost  methods  are  being  installed  in 
a  number  of  plants.  These  have  all  advanced  their  prices  to 
somewhere  near  their  costs  on  the  articles  which  they  were 
formerly  selling  at  a  loss.  The  plants  report  that  they  are  get- 
ting these  prices  in  spite  of  the  fact  that  some  of  the  advances 
were  quite  heavy. 

In  many  cases  the  accounting  is  so  deficient  that  profits  are 
the  veriest  matter  of  guess — and  the  guess  is  always  far  above 
the  real  mark.  Take  a  case  in  point  which  will  serve  well  to 
emphasize  the  dangers  of  any  haphazard  method. 

A  Concrete  Example.  A  coal  operator  had  leased  a  mine 
for  a  short  term,  on  the  condition  that  if  he  succeeded  in  making 
the  mine  a  profitable  enterprise,  he  would  be  given  a  long-term 
lease.  The  first  year's  production  was  60,000  tons.  He  calcu- 
lated that  he  made  a  dollar  a  ton  profit;  that  is,  $60,000.  But 
he  knew  that  he  had  withdrawn  for  his  own  uses  the  sum  of 
$5,000,  and  therefore  he  conveniently  arrived  at  the  conclusion 
that  his  net  profit  for  the  year  was  $55,000;  but  he  did  not  have 
$55,000,  or  any  sum  resembling  $55,000  in  the  bank.  He  called 
in  an  accountant  to  find  out  what  had  happened  to  his  money. 

His  books  were  remarkable.  They  were  a  cross  between 
double  entry  and  single  entry.  The  young  woman  who  acted  as 
bookkeeper  credited  or  debited  according  to  her  mood  of  the 
moment,  and  entirely  without  relation  to  whence  the  money 
had  come  or  whither  it  went. 

The  proprietor,  in  arriving  at  his  calculation  of  profit,  had 
necessarily  been  quite  independent  of  his  crazy  books,  and  had 
reached  the  profit  of  $1  a  ton  by  some  sentimental  course  of 
reasoning.  He  had  neglected  almost  every  charge  that  could 
be  neglected.  He  had  not  charged  himself  with  labor,  which 
reduced  his  fanciful  $55,000  by  the  neat  sum  of  $30,000.  He 
had  not  reckoned  merchandise  purchased  or  the  lumber  used  in 
props  or  shoring.  Neither  had  he  charged  off  any  portion  of 
the  investment  in  additional  equipment  which  he  had  been 
forced  to  make  before  he  began  to  mine.  There  had  been  no 
check  on  expenditure.  He  had  decided  on  each  expenditure  and 
the  amount  thereof  purely  with  regard  to  the  necessities  of  the 
moment  and  without  relation  to  the  progress  of  the  business. 

What  His  Profits  Really  Were.  It  came  out  that  he  had 
actually  made  a  profit  of  25  cents  a  ton  and  not  a  dollar,  and 


16  BUSINESS  ACCOUNTANCY 

that  his  total  profits  were  $14,000  and  not  $55,000.  When  the 
statement  of  the  actual  conduct  of  his  business  was  before  him, 
instantly  he  discovered  numerous  places  at  which  economies 
might  have  been  effected.  He  was  amazed  to  see  he  had  over- 
looked wastes  which  seemed  so  obvious  when  set  forth  in  clear 
figures.  His  case  was  not  unusual;  although  a  man  of  con- 
siderable means,  he  had  never  before  seen  a  statement  of  any 
business  in  which  he  was  concerned,  and  also  he  had  never 
made  up  a  statement  of  his  own  personal  affairs  by  other  than 
the  "rule  of  thumb"  method. 

If  a  vaguely  conceived  and  totally  inaccurate  statement 
discloses  a  large  profit,  it  is  only  human  nature  for  the  proprietor 
to  have  a  profound  sense  of  self-satisfaction;  he  will  not  be 
inclined  to  inquire  into  the  "why"  or  "how"  of  the  supposed 
profit,  or  to  make  a  real  effort  to  improve  the  business.  But 
if  the  statement  be  accurate,  the  why  and  how  of  the  profit  will 
appear,  and  the  items  being  separated,  comparisons  with  previous 
years  will  be  promoted  and  investigation  invited. 

\  Locating  the  Profitable  Business.  The  data  furnished 
must  not  only  arouse  the  emotion  of  the  executive,  but  guide 
him  immediately  to  the  spot  where  action  is  needed.  The 
development  of  the  following  account  from  lump  sums  to  details 
shows  how  an  executive  may  or  may  not  locate  the  profit  items. 
It  is  taken  from  manufacturing,  but  the  thought  holds  equally 
for  merchandising.  The  profit  or  loss  statement  of  a  concern 
was  as  follows: 

Sales $100,000 

Manufacturing  cost 90,000 

Selling  expense 7,000 

Net  profit $3,000 

A  net  profit  of  $3,000  on  total  sales  of  $100,000  is  certainly  not 
satisfactory  and  is  quite  sufficient  to  cause  the  ordering  of  a 
general  investigation.  But  unless  the  accounts  are  well  ordered, 
this  general  investigation  will  be  a  long  task  and  the  executive 
is  more  than  likely  to  put  down  the  small  profit  to  some  business 
condition,  such  as  close  competition  or  the  like,  and  pray  that 
the  next  year  will  be  better. 

The  above  concern  dealt  in  three  commodities.  If,  instead 
of  using  a  statement  such  as  the  above,  one  similar  in  form  to 
the  following  had  been  made,  considerably  more  light  would 
have  been  thrown  on  the  situation. 


THE  EFFECT  ON  PROFITS  17 

Commodity  Commodity  Commodity 

ABC  Total 

Sales $50,000         $30,000         $20,000  $100,000 

Manufacturing  cost 48,000           25,000           17,000  90,000 

Selling  expense 3,500            2,100            1,400  7,000 

Profit $2,900           $1,600  $3,000 

Loss $1,500 

By  merely  separating  the  three  commodities  it  appears  that 
on  one  there  was  a  loss,  on  another  a  fair  profit  and  on  the  third 
an  excellent  profit.  But  here  again  this  statement  is  deficient, 
for  the  information  given  to  the  executive  concerns  only  one 
phase  of  the  business;  that  is,  the  sales  policy,  from  which  it 
might  appear  that  it  would  be  well  to  drop  the  manufacture  of 
the  commodity  upon  which  a  loss  had  been  sustained.  But 
there  is  no  indicator  in  this  statement  as  to  the  efficiency  of 
operating  nor  any  sign  that  the  item  of  manufacturing  cost  may 
not  be  higher  than  the  average,  due  to  low  production,  to  extrava- 
gance in  operating,  to  extraordinary  expenditure,  or  to  any  of 
the  many  elements  which  go  to  make  up  manufacturing  cost 
and  which  might  be  controlled  or  reduced. 

Statements  on  a  Unit  Basis.  This  difficulty  would  be 
avoided  if  the  statement  were  reduced  to  a  unit  basis. 

Commodity  Commodity  Commodity 

ABC  Total 

Sales $50,000         $30,000         $20,000  $100,000 

Manufacturing  cost 47,000           23,500           16,500  87,000 

Selling  expense 3,500             2,100             1,400  7,000 

Profit $4,400          $2,100  $6,000 

Loss $500 

Loss  due  to  abnormal  expenses 3,000 

Net  profit •     $3,000 

This  statement  permits  the  executive  to  place  the  blame  for 
some  of  the  low  profit  to  excessive  expense  cost  and  possibly  to 
some  items  that  caused  the  increase.  Therefore,  he  summons 
his  superintendent  and  points  out  to  him  the  weak  spots.  Now 
the  superintendent  is  in  trouble,  for  who  among  his  foremen  is 
responsible?  Unless  he  has  an  exact  means  of  determining  the 
responsibility,  he  will  either  drop  the  matter  at  once  or  he  will 
take  all  the  foremen  earnestly  and  impartially  through  a  course 
of  sprouts,  and  thereby  probably  cause  general  dissatisfaction. 
Had  there  been  a  subsidiary  departmental  expense  report,  the 


18 


BUSINESS  ACCOUNTANCY 


blame  could  have  been  fixed, 
as  follows: 


Such  a  report  would  have  read 


Department  1 . 
Department  2 . 
Department  3 . 


Gain 
$200 


Department  4 225 


Department  5 . 
Department  6 . 
Department  7 . 


200 


S625 


Loss 

$   375 
2,050 


500 

700 
§3,625 
.S3.000 


Explanation 
Large  production 
Heavy  repairs 
Heavy   spoilage    and 

low  production 
Low    non-productive 

labor 

Increased  production 
Low  production 


Net  loss  due  to  abnormal  expenses 

This  subsidiary  report  would  have  led  the  executive  to  have 
at  once  placed  the  responsibility  for  the  abnormal  expense  cost 
to  the  heavy  spoilage  and  low  production  in  department  3,  and 
therefore  he  could  immediately,  upon  reading  the  statement, 
have  turned  to  the  subsidiary  statement  for  the  exact  cause  of 
the  loss  and  have  devised  a  quick  remedy. 

Labcr  Efficiency.  The  expense  cost  is  not  the  only  feature 
that  should  be  reduced  to  a  unit  basis.  Under  most  cost  meth- 
ods, the  labor  cost  of  the  articles  produced  is  so  hidden  in  a 
mass  of  detail  that  it  is  exceedingly  difficult,  if  not  impossible, 
to  get  a  comprehensive  view  of  the  labor  efficiency  of  a  depart- 
ment and  the  actual  ability  of  the  responsible  foreman.  The 
ultimate  development  of  unit  labor  cost  is  piece  work,  because 
then  there  can  be  no  variation  in  labor  cost.  Under  a  bonus  or 
premium  plan,  a  limited  means  of  measuring  labor  efficiency  is 
given  by  efficiency  percentages  in  each  department  and  the 
executive  would  get  another  report  something  like  this,  which 
will  be  found  valuable  as  a  means  of  comparison. 

Labor  efficiency 

Department  1 75% 

Department  2 88% 

Department  3 92% 

Department  4 105% 

Department  5 101% 

Department  6 103% 

These  efficiency  percentages  are  very  valuable  for  compari- 
sons, but  they  are  hard  to  translate  into  terms  of  dollars  and 
cents,  while  a  labor  cost  report  of  the  departments  will  give  the 
exact  trouble  in  terms  of  money,  thus: 


Gain 

Loss 

$   125 

225 

2,450 

$   300 

700 

200 

THE  EFFECT  ON  PROFITS  19 


Department  1 

Department  2 

Department  3 

Department  4 

Department  5 

Department  6 

$1,200         $2,800 

It  is  plainly  evident  that  pressure  should  be  brought  to  bear 
on  department  3  if  a  normal  profit  throughout  the  whole  concern 
is  to  be  realized.  Bringing  back  all  of  these  reports  to  the 
final  statement,  the  proper  profit  or  loss  statement  in  this  case 
would  be  thus: 

Commodity  Commodity  Commodity 

ABC  Total 

Sales $50,000         $30,000         $20,000       $100,000 

Manufacturing  cost 46,000  23,500  15,900  85,400 

Selling  expense 3,500  2,100  1,400  7,000 

Profit $500  $4,400  $2,700  $7,600 

Loss  due  to  abnormal  expenses $3,000 

Loss  due  to  labor  inefficiency 1,600 

Net  profit $3,000 

This  report  exhibits  to  the  executive  at  the  first  glance  the 
difficulties  with  the  business.  Instead  of  being  forced  to  wonder 
why  the  total  profit  is  so  small,  he  will  see  at  once  that  the  loss 
is  due  to  abnormal  expenses  and  to  labor  inefficiency;  in  other 
words,  that  the  sales  department  is  not  so  much  to  blame  as  the 
manufacturing  end.  He  does  not  need  to  speculate  on  the 
abnormal  expense  item  nor  to  generalize  to  his  subordinates. 
He  can  point  out  immediately  from  the  subsidiary  statements 
that  departments  2,  3,  5,  and  6  are  running  much  higher  than 
usual  and  then  the  subsidiary  labor  report  illuminates  that  item. 

The  above  is  a  very  simple  case,  but  it  illustrates  exactly  why 
proper  and  continued  profits  are  not  to  be  expected  without 
accurate  accounting. 

Expense  Analysis.  Take  another  case.  In  the  old  state- 
ments and  among  those  who  today  are  not  familiar  with  modern 
accounting  methods,  one  meets  such  titles  as  "general  expense" 
or  "selling  expense,"  into  which  items  sink  the  expenses  caused 
by  errors  of  judgment  or  extravagance  and  which  have  remained 
hidden  from  executive  eyes  until,  at  the  end  of  the  year,  they 
merge  into  the  profit  and  loss  account  and  thus  pass  unheralded 


20  BUSINESS  ACCOUNTANCY 

into  eternity.  But  suppose  there  exists  a  skilfully  arranged 
expense  analysis  of  operations,  whereby  comparison  is  made 
monthly  with  the  results  obtained  in  the  previous  months  and 
during  the  same  period  in  previous  years.  Then  extravagance 
comes  to  light  for  intensive  contemplation. 

A  concern  which  was  operating  in  a  semipublic  service 
capacity  found  that  in  order  to  meet  competition  it  would  be 
necessary  to  adopt  a  liberal  policy  in  deliveries  and  also  to  adver- 
tise quite  heavily.  The  new  policy  was  adopted  in  desperation 
and  almost  in  the  dark.  Then  the  directors  and  the  executives 
determined  that  they  must  know  exactly  where  they  stood. 
They  had  an  audit  of  the  business  made  by  outside  accountants, 
who  also  installed  a  new  method  of  accounting  which  exhibited 
all  phases  of  operating  cost  and  not  merely  those  related  to 
materials  or  labor. 

The  previous  accountancy  on  materials  and  labor  had  been 
fairly  good,  but  the  remaining  expenditures  had  been  tossed 
together  under  the  unilluminating  title  of  " general  expense." 
The  new  method  analyzed  this  general  expense  and  brought 
revelation  after  revelation,  and  in  their  trail  economies  which 
ranged  from  the  elimination  of  elaborate  personal  stationery 
bought  in  small  lots  for  unimportant  executives,  to  an  overliberal 
entertainment  account,  excessive  telephone  calls,  taxi  bills,  and 
the  like.  So  great  were  the  economies  effected  by  cutting  out 
useless  expense,  that  enough  money  was  saved  to  pay  for  the 
added  charges  under  the  new  plan  of  operation  and  also  for  the 
advertising  campaign.  Out  of  the  increased  business  which 
these  progressive  methods  brought,  a  further  profit  has  now 
been  obtained. 

Analyzing  Selling  and  Freight.  Another  company  found 
that  its  profit  was  small,  although  the  sales  had  been  very  large. 
Among  the  high  expenses  were  "selling"  and  "freight."  It  was 
the  custom  in  that  business  to  pay  freight  costs.  The  freight 
item  is  seldom  analyzed  or  distributed,  but  this  item  was  so 
large  here  that  an  investigation  was  made  and  it  was  apportioned 
territorially.  Then  it  was  discovered  that  in  shipments  to  the 
Pacific  Coast  there  was  an  actual  loss  on  every  pound  of  goods 
sold.  Further  digging  brought  out  that  not  only  was  there  a 
loss  on  these  shipments  insofar  as  freight  was  concerned,  but 
it  also  demonstrated  that  it  was  an  actual  loss  to  send  sales- 
men over  the  great  distances. 


THE  EFFECT  ON  PROFITS  21 

As  a  consequence  of  these  figures,  an  arrangement  was  made 
with  a  wholesale  house  in  the  West  to  handle  the  company's 
products  on  a  basis  of  f.  o.  b.  point  of  manufacture.  The  agent 
was  selling  other  lines  and  could  distribute  the  expense  of  sales- 
men among  a  large  number  of  high-priced  products  and  also 
could  make  a  satisfactory  agent's  profit  by  so  organizing  his 
shipping  as  to  be  able  to  ship  the  goods  in  carload  lots  to  the 
Coast  and  reshipping  in  mixed  consignments. 

A  Small  Item,  but  Nevertheless  Important.  A  company 
which  required  and  rented  considerable  additional  storage  facili- 
ties from  time  to  time  during  the  year,  had  on  its  property  a 
dwelling  house.  This  it  rented  to  an  employee.  When  the 
annual  statement  came  through,  it  showed  that  the  company 
was  both  paying  and  receiving  rent.  The  executives  had  not 
before  thought  of  the  situation  in  that  fight.  They  then  found 
that  the  dwelling  house  contained  sufficient  storage  space  to 
make  it  more  profitable  to  store  goods  therein  than  to  rent  it 
for  dwelling  purposes  at  the  price  the  company  was  compelled 
to  pay  for  storage  outside. 

Here  is  another  case  in  which  accountancy  demonstrated 
that  it  was  cheaper  to  borrow  money  than  to  increase  capital. 

A  group  of  men  who  had  been  for  years  in  executive  capacities 
decided  to  pool  their  resources  and  start  a  business  of  their  own. 
Thoroughly  knowing  the  selling  field  and  also  the  manufacturing 
end,  they  decided  that  they  could  sell  about  $600,000  worth  of 
goods  during  the  first  year.  They  found  that  they  could  build 
and  equip  a  plant  sufficient  to  handle  such  a  volume  or  even  a 
larger  volume  with  an  outlay  of  $100,000. 

In  this  business  the  manufacturing  cost  was  light  as  com- 
pared with  the  cost  of  the  raw  materials  and  the  selling  expense. 
It  was  peculiarly  a  seasonal  business.  Their  purchases  would 
extend  over  a  period  of  nine  months,  during  which  time  they 
would  need  a  sum  of  $400,000  at  the  "peak"  point  of  purchases, 
but  this  sum  would  be  utilized  gradually  and  in  dividing  the 
entire  sum  by  the  actual  time  employed,  it  appeared  that  they 
would  require  $400,000  for  three  months.  That  is,  the  interest 
charges  on  all  the  money  that  they  would  require  during  nine 
months  would  amount  to  interest  on  $400,000  during  three 
months.  This  was  worked  out  on  an  accountancy  basis  and  it 
was  settled  that  they  would  contribute  $100,000  working  capital 
and  borrow  $300,000. 


22  BUSINESS  ACCOUNTANCY 

The  profit  in  their  first  year  of  business  was  $14,000,  being 
low  on  account  of  the  initial  selling  and  organization  expenses 
of  the  new  business,  but  this  was  equal  to  14%  on  the  con- 
tributed working  capital,  the  borrowed  money  costing  them 
$4,500  in  interest. 

How  the  Deal  Might  Have  Turned  Out.  Now,  suppose 
these  men  had  not  had  a  proper  exhibit  of  their  contemplated 
business  before  them.  Suppose  they  had  not  planned  accurately 
ahead  and  had  themselves  contributed  enough  working  capital 
to  conduct  the  business.  It  so  happened  that  they  were  amply 
able  to  contribute  the  capital,  had  they  so  desired.  Had  they 
themselves  put  in  the  $300,000  instead  of  borrowing  it,  they 
would  have  saved  $4,500  in  interest  paid  and  therefore  the  net 
profit  would  have  been  increased  to  $18,500.  This  would  have 
given  a  net  profit  of  4.6%  on  a  working  capital  of  $400,000  as 
against  14%  on  $100,000. 

The  $300,000  which  they  did  not  put  into  the  business,  but 
held  in  reserve  in  their  own  individual  strong  boxes,  they  found 
had  netted  them  as  individuals  an  average  income  of  5^%  or 
$16,500.  Therefore  by  using  borrowed  money  instead  of  their 
own  money  they  made  $12,000  over  and  above  what  they  would 
have  made  had  they  undertaken  to  finance  themselves.  That 
is,  mingling  for  the  moment  the  funds  which  they  placed  in  the 
company  and  the  funds  which  they  kept  for  themselves,  they 
had  a  net  profit  of  7.6%  as  against  a  possible  4.6%. 

Planning  the  Business  Ahead.  Had  these  men  not  been 
in  possession  of  a  lucid  system  of  accounts,  it  is  safe  to  say  that 
they  could  never  have  discovered  the  profit  that  lurked  in  bor- 
rowed money  and  certainly  they  could  never  have  borrowed  the 
money  had  they  not  been  able  to  put  their  case  conclusively 
before  the  note  broker  or  financiers  in  detailed  figures  to  prove  the 
soundness  of  their  enterprise  as  well  as  their  business  judgment. 

The  whole  financial  structure  of  any  business  is  founded  on 
the  accounting — not  merely  on  the  tabulation  of  the  receipts 
and  the  expenditures,  but  on  that  coordination  which  permits  an 
intelligent  grasping  of  relations  and  therefore  a  coordination  of 
the  work  in  hand,  the  moneys,  and  the  profits.  In  other  words, 
it  permits  planning. 

Planning  is  more  than  a  device  to  promote  regular  deliveries; 
it  has  greater  commercial  value  than  securing  the  good  will  of 
customers;  planning  is  the  very  pith  of  profitable  business. 


THE  EFFECT  ON  PROFITS  23 

Manufacture  is  a  form  of  wealth  production  which  operates 
by  increasing  the  utility  of  the  raw  material  it  receives.  In 
the  process,  part  of  the  increased  value  becomes  the  compensa- 
tion for  the  success  of  the  venture  and  its  impetus  as  well. 

Capital  is  involved  in  the  scheme,  but  the  capital  is  of  two 
very  distinct  kinds,  namely,  fixed  and  fluid.  The  fixed  capital 
is  represented  by  buildings  and  equipment;  the  fluid  is  usually 
known  as  the  working  capital.  Innumerable — indeed  most — 
commercial  difficulties  or  failures  are  traceable  to  inadequate, 
insufficient,  or  insolvent  working  capital. 

The  provision  and  disposition  of  working  capital  is  the 
essence  of  commercial  success.  And  here  it  is  that  the  connection 
is  found  between  planning  and  finance. 

Planning  operates  chiefly  to  conserve  the  engagement  of 
working  capital,  to  expedite  its  return  to  the  initial  point  of  that 
cycle  represented  by  the  processing  and  sale  of  goods  or  mer- 
chandise. It  is  directed  primarily  to  minimize  the  capital 
represented  by  goods  in  process  and  to  accelerate  the  turnover. 

Rapid  Development  Demands  Plenty  Capital.  A  com- 
pany had  been  about  doubling  the  volume  of  its  business  yearly 
for  almost  a  decade.  The  greatest  worriment  which  accompanied 
this  rapid  development  was  the  provision  of  sufficient  working 
capital.  The  situation  became  so  acute  that  outside  advice  was 
sought  and,  as  a  result,  an  examination  was  made  of  the  con- 
ditions, and  from  it  the  following  facts  were  developed : 

The  process  inventory  amounted  to  about  $800,000.  The 
rate  of  production  was  about  $300,000  a  month  in  terms  of  cost 
value  of  finished  product.  The  average  turnover  is  indicated 
by  the  following  formula:  $800,000 -$300,000  =  2.6  months,  or 
80  days.  The  company  carried  no  finished  stock  but  delivered 
directly  from  manufacture. 

Careful  study  of  the  processes  and  the  time  elements  revealed 
that  a  very  workable  turnover  would  be  about  30  days.  They 
needed  the  tight  control  and  coordination  of  a  planning  system. 

A  simple  but  effective  scheme  of  planning  was  installed  and 
in  the  course  of  a  year  the  same  volume  of  production  ($300,000 
monthly)  was  carried  on  a  process  inventory  of  $450,000.  This 
turnover  is  represented  by  this  formula:  $450,000 -$300,000  = 
1.5  months  or  45  days;  a  reduction  of  the  previously  prevailing 
period  by  35  days — in  that  year  the  process  stock  was  turned 
over  more  than  twice  as  many  times  as  in  the  previous  year. 


24  BUSINESS  ACCOUNTANCY 

This  meant  the  same  profit  with  about  half  the  working  capital 
or  twice  the  profit  with  the  same  working  capital,  if  the  volume 
would  again  be  increased. 

The  foregoing  examples  are  not  given  as  part  of  a  compre- 
hensive scheme  by  which  accountancy  can  make  for  profits  but 
merely  as  hints  of  the  many  directions  in  which  it  operates — 
to  show  the  business  man  a  little  of  what  mere  books  can  do. 

The  thought  is  this;  most  business  ills,  like  most  human 
ills,  are  due  to  hidden  causes;  until  the  cause  is  known,  only 
empirical  remedies  can  be  applied.  But  once  the  cause  is 
found,  then  the  scientific  antidote  can  be  had.  Accountancy 
locates  the  real  causes  and  points  the  way  to  the  proper  remedy. 

An  X-ray  photograph  does  not  of  itself  mend  the  broken 
bone,  but  it  does  tell  the  exact  nature  of  the  injury  and  permits 
the  physician  to  proceed  with  precise  knowledge.  Accounting 
is  the  X-ray  of  business — it  permits  the  owner  to  diagnose  and 
hence  to  heal  the  disorder. 


CHAPTER  III 

THE  ESSENTIALS  OF  BOOKKEEPING 

THE  mechanics  of  bookkeeping  have  traveled  far  since  the 
days  when  good  bookkeeping  had  rather  to  do  with  the 
appearance  of  the  neatly  ruled,  immaculately  written, 
red-inked  pages,  than  with  their  actual  contents.  The  efficient 
bookkeeper  was  the  man  who  never  made  a  smudge  on  the 
page  nor  a  mistake  in  addition  or  subtraction.  He  was  not 
expected  to,  and,  in  fact,  did  not  comprehend  within  his  heavy 
leather  volumes  more  than  a  record  of  transactions.  He  knew 
little  more  about  the  actual  condition  of  the  business  that 
employed  him,  than  does  the  adding  machine  of  today. 

I  remember  one  such  bookkeeper  who  was  noted  for  his 
accuracy  and  faithfulness;  he  was  held  up  everywhere  as  a 
model  of  his  calling,  and  was  in  much  demand  of  nights  among 
lawyers  to  prepare  the  accounts  of  estates  for  them.  But  that 
man  browsed  amongst  his  tomes  during  three  years  while  his 
concern  was  losing  money  so  rapidly  that  it  became  a  bankruptcy 
cropper — and  he  never  even  sensed  that  the  company  was  in 
trouble.  He  had  taken  the  figures  given  him  by  the  officers, 
entered  them  without  question,  and  blissfully  made  up  bank 
statements  on  the  strength  of  the  figures — bank  statements 
that  would  have  landed  him  in  jail  had  not  the  creditors  been 
lenient,  for  he  held  the  pro  forma  title  of  treasurer,  and  as  such 
signed  the  statements. 

That  sort  of  bookkeeper  has  passed  out  of  the  well  managed, 
modern  office;  many  of  the  formerly  cherished  records  have 
also  gone,  and  machines  have  largely  replaced  the  beautiful 
chirography  of  old,  but  the  fundamental  idea  or  theory  of  book- 
keeping has  not  changed.  Whatever  the  present-day  refine- 
ments and  conveniences,  they  all  relate  back  to  the  ancient 
axiom  that  every  debit  must  have  its  credit — to  the  double 
entry  system. 

Many  readers  are  probably  familiar  with  the  fundamentals 
of  bookkeeping,  and  for  them  a  discussion,  which  must  needs 

25 


26  BUSINESS  ACCOUNTANCY 

be  elementary,  is  scarcely  necessary.  The  man  who  has  passed 
the  kindergarten  of  accountancy  will  do  well  to  skip  this  chapter, 
for  it  is  frankly  of  a  primary  nature. 

But  there  are  many  others  who  will  want  to  brush  up,  even 
if  ever  so  slightly,  on  their  knowledge,  or  who,  through  the  use 
of  card  systems  or  so-called  short-cut  methods  have  lost  track 
of  simple  bookkeeping. 

Rehearsing  the  Primary  Principles  of  Accounting. 
One  cannot  be  too  familiar  with  the  primary  principles;  a 
surprising  number  of  seemingly  intricate  problems  resolve 
instantly  into  their  elements  when  we  diagnose  them  according 
to  the  maxims. 

I  therefore  think  it  best  to  start  with  the  assumption  that 
the  reader  knows  nothing  of  bookkeeping,  and  then  go  step  by 
step  into  the  higher  grades. 

I  have  chosen  my  examples  largely  from  manufacturing, 
but  only  because  the  concern  which  both  manufactures  and  sells 
has  nearly  all  the  problems  of  bookkeeping.  The  fundamentals 
do  not  change  with  the  character  of  the  business.  The  man 
who  learns  fundamentals  from  examples  drawn  from  a  business 
of  a  type  different  from  his  own,  will  know  these  principles  far 
better  than  if  he  studied  them  in  his  own  affairs. 

No  one  can  intelligently  use  a  set  of  forms  unless  he  also 
knows  all  of  the  reasons  behind  the  forms.  No  end  of  failures 
result  from  the  unquestioning  adoption  of  standard  methods; 
for  unless  you  know  the  "why"  of  the  method,  you  cannot 
check  your  mistakes.  Forms  are  most  useful,  systems  are 
invaluable,  but  they  must  be  taken  as  suggestions  of  better 
methods,  not  as  substitutes  for  the  foundation  knowledge. 

The  Single  Entry  System.  Why  do  we  enter  business? 
To  make  a  profit.  That  is  the  sole  end  of  business.  The  profit 
is  made  through  the  exchange  of  commodities  for  a  higher  price 
than  that  at  which  we  purchased  them,  either  through  a  sale 
of  them  unchanged  or  through  a  fabrication  and  sale;  the  profit 
may  be  concealed  under  another  name  such  as  commission  or 
brokerage,  and  we  may  never  have  title  to  that  which  we  sell, 
but  the  principles  of  procedure  are  broadly  identical.  We 
gain  either  through  an  added  price  to  the  buyer  or  by  an  allow- 
ance from  the  seller. 

Thus  there  are  three  steps  in  business — buying,  holding  for 
sale  or  for  manufacture  and  sale,  and  selling.    The  steps  are 


BOOKKEEPING  ESSENTIALS  27 

represented  by  three  classes  of  accounts — those  with  our  creditors, 
those  with  the  business,  and  those  with  our  debtors  or  cus- 
tomers. The  first  and  the  last  of  these  accounts  are  with  indi- 
viduals; they  tell  us  what  we  owe  and  what  is  owed  to  us; 
the  second  account  is  that  of  the  operation  and  is  with  things 
instead  of  individuals — is  with  portions  of  the  business. 

What  Accounting  Should  Include.  Accounting  should 
comprehend  the  whole  history  of  a  business,  and  tell  us  why  we 
make  or  lose  money.  If  it  fails  in  that  information,  it  is  not 
accounting.  The  single  entry  system  deals  only  with  individual 
accounts  and  not  with  business  accounts,  and  therefore  it  does 
not  give  a  commercial  record  and  is  not  to  be  considered  as 
accounting.  And  the  situation  is  not  changed  by  having  the 
single  entry  plan  elaborated  by  mechanical  or  other  contrivances; 
if  there  are  no  accounts  with  the  business,  there  can  be  no  proper 
record  of  its  affairs  and  we  cannot  know  our  progress. 

The  system  gets  its  name  from  the  fact  that  only  entries  for 
individuals  are  made — they  may  be  made  in  more  than  one  place, 
but  only  in  a  single  form. 

The  Basis  of  Proper  Accounting.  The  basis  of  the  "  en- 
tire' '  proper  accounting  structure  is  the  double  entry  system  of 
bookkeeping,  because  of  its  expositions  and  its  numerous  checks 
and  safeguards  designed  to  reduce  to  a  minimum  the  chances  of 
loss  through  the  inevitable  errors  and  inadvertences  of  clerks. 

No  business,  no  matter  how  small,  can  safely  go  forward 
unless  controlled  by  some  form  of  the  double  entry  system. 
The  single  entry  plan  is  an  invitation  to  loss — to  a  serious  loss 
of  profit,  serious  because  it  will  never  be  detected  unless  by 
accident,  for  single  entry  does  not  tell  the  "why"  and  the  "how. " 
The  difference  between  the  two  plans  is  basic ;  it  is  important  to 
grasp  clearly  the  antipodal  foundations,  and  this  can  best  be 
done  by  concrete  example. 

But  three  books  are  necessary  for  single  entry  bookkeeping — 
a  day  book  or  journal,  a  ledger,  and  a  check  book  which  also 
acts  as  a  cash  book.  Take  a  simple  transaction.  John  Brown 
embarks  in  the  business  of  buying  and  selling  potatoes  with  a 
cash  capital  of  $32,  all  of  which  he  lays  out  in  a  stock.  The 
facts  covering  these  transactions  are  entered  in  the  day  book  or 
journal  as  shown  in  Form  1. 

At  the  end  of  the  day,  these  accounts  are  posted  to  ledger 
accounts,  which  then  appear  as  in  Forms  2  and  3. 


28 


BUSINESS  ACCOUNTANCY 


Jane  8,    1918 

Bought  of  John  Brown 
10  Bu.  Potatoes 

Sold  to  Abrarc  Morris 
5  Bu.  Potatoes 

•  3.20 

•  3.50 

32 
17 

00 

50 

June  20,   19 18 

Paid  John  Brown 
Received  of  Abram  Morris 

32 
17 

00 

50 

Form  1   (^ 

JOHN     BROWN 

1 

v»  j 

See  Ck.  Ek.   No.   627 

32 

00 

6/8 

10  Bu.  Potatoes 

a  3.20 

32 

00 

Form  2 

"L-—^ 

ABRAM     MORRIS 


6/8 


5  Bu.  Potatoes 
*>                       ©  3.50 
Form  3  V 


17   50 


6/20 


See  Ck.  Bk. 


17 


50 


On  the  check  book  stub  is  recorded  the  reason  for  the  drawing 
of  each  check,  and  on  the  opposite  blank  page  facing  the  stub  are 
recorded  the  receipts  in  detail.  The  single  entry  system  does 
not  take  into  recognition  an  initial  cash  capital  of  832,  excepting 
to  record  it  in  the  check  book.  Under  the  single  entry,  the  only 
method  of  arriving  at  profit  or  loss  is  by  taking  the  excess  of  the 
assets  over  the  liabilities,  or  vice  versa.  The  assets  are  com- 
piled from  the  amounts  known  to  be  due  from  debtors,  cash  in 
hand,  and  inventory.  The  liabilities  are  arrived  at  by  footing 
up  the  bills  which  are  owed.  The  result  is  the  standing  of  the 
firm.  But  there  being  no  check  or  fashion  of  proving  the  reckon- 
ing's accuracy,  it  is  impossible  to  trace  an  error. 

Suppose  that,  in  the  above  instance,  the  clerk  sold  potatoes 
to  the  value  of  SI. 75  to  one  Jones,  and  made  another  sale  of  a 


BOOKKEEPING  ESSENTIALS  29 

like  amount  to  one  James,  and  forgot  to  record  either  transac- 
tion in  the  day  book  or  journal.  At  the  end  of  the  month  the 
merchant  would  take  his  trial  balance  to  discover  whether  he 
has  lost  or  made  money. 

He  has  cash  in  the  bank  to  the  sum  of  $17.50,  this  being  the 
initial  capital  plus  the  amount  paid  by  A.  Morris  and  less  the 
amount  paid  to  Brown;  he  has  on  hand  potatoes  to  the  value 
of  $12.80  according  to  their  purchase  price,  making  total  assets 
of  $30.30.  Clearly  his  original  capital  has  been  impaired  by 
a  loss  of  $1.70.  The  loss  is  due  to  the  failure  to  record  total 
sales  of  $3.50  to  Jones  and  James.  There  is  nowhere  on  the 
books  an  entry  which  might  give  a  clew  to  the  reason  for  the 
loss — it  might  have  been  due  to  an  error  or  to  theft ;  the  trades- 
man can  take  his  pick.  He  must  rest  with  the  knowledge  that 
he  has  suffered  a  loss. 

From  this  very  simple  instance  it  can  readily  be  deduced 
that  any  comprehensive  system  of  accounting,  based  on  single 
entry,  is  impossible.  The  oversight  of  the  clerk  in  this  instance 
presents  endless  possibilities  for  multiplication  as  the  business 
becomes  more  voluminous.  As  the  opportunity  for  error  in- 
creases, the  chances  of  discovering  the  omission  become  less  and 
it  soon  becomes  apparent  that  such  a  system  becomes  inadequate. 

The  Double  Entry  System.  The  single  entries  did  not 
reckon  with  other  than  the  buying  and  the  selling  of  the  mer- 
chandise— they  did  not  note  that  the  potatoes  had  come  into 
the  business  and  that  some  of  them  still  remained.  We  know 
only  by  actual  count  that  some  of  them  were  on  hand.  In 
other  words,  the  critical  operation — the  passing  of  the  mer- 
chandise through  the  business — was  entirely  neglected.  This 
defect  is  supplied  by  the  double  entry  system. 

In  addition  to  the  accounts  with  individuals,  we  now  have 
accounts  with  the  business  itself  which  record  the  coming  in  and 
the  passing  out  of  merchandise  and  money.  The  new  accounts 
are  called  the  "business"  or  "nominal"  accounts.  When  we 
take  anything  into  the  business  we  debit  one  of  these  accounts, 
and  when  we  withdraw  anything,  we  make  a  credit.  They  are 
founded  on  the  theory  that  the  business  is  an  entirety  in  itself, 
and  that  the  real  records  are  not  of  our  own  personal  dealings, 
but  of  the  business ;  in  the  former  plan  we  had  taken  a  personal 
stand — that  only  what  we  bought  or  sold  was  of  sufficient  im- 
portance to  chronicle. 


30  BUSINESS  ACCOUNTANCY 

Now  each  portion  of  the  business  takes  an  account  of  its  own 
— merchandise,  expense,  sales,  and  so  on — recording  that  which 
comes  in  and  that  which  goes  out.  Hence  each  transaction  has 
two  entries,  one  credit  and  one  debit.  There  must  be  a  support- 
ing debit  for  every  credit,  and  vice  versa. 

Debit  and  Credit.  A  debit  is  a  characterization  of  that 
which  comes  into  the  business  or  causes  something  to  go  out 
of  the  business.  For  instance,  cash  is  received  and  is  therefore 
debited  in  the  cash  account.  The  reason  for  the  cash  having 
been  received  is  that  merchandise  has  been  sold — the  mer- 
chandise has  gone  out  of  the  business.  The  one  offsets  the 
other.  A  credit  is  given  for  that  which  goes  out  of  the  business, 
or  causes  something  to  come  into  the  business.  Cash  has  gone 
out  of  the  business  through  the  purchase  of  merchandise.  There- 
fore the  merchandise  has  come  into  the  business  and  the  debits 
and  credits  will  always  total  an  identical  amount.  These  nomi- 
nal accounts  are  the  source  of  the  checks  and  balances,  and  per- 
mit the  exact  location  of  errors. 

Operation  of  Double  Entry.  The  elementary  or  basic 
books  required  in  a  simple  system  are  as  follows: 

1.  Journal.  This  is  identical  in  form  with  the  single  entry 
book  of  the  same  title,  and  may  be  used  for  recording  purchases 
and  sales  other  than  for  cash,  and  such  adjusting  and  year-end 
closing  entries  as  are  needed. 

2.  Cash  Book — in  which  are  recorded  all  of  the  receipts 
and  disbursements;  in  the  single  entry  system,  these  were 
covered  in  the  check  book. 

3.  Ledger.  This  is  the  controlling  book  of  the  double 
entry  system,  and  to  it  are  posted  all  entries  appearing  in  the 
journal  and  cash  book. 

The  operations  just  given  in  single  entry  would  be  recorded 
under  double  entry  as  shown  in  Forms  4  to  10  inclusive. 

Take  these  entries  in  detail.  Merchandise  has  come  into 
the  business  to  the  value  of  S32;  the  purchase,  therefore,  is 
recorded  in  the  journal  to  the  debit  of  merchandise.  There 
must  be  a  corresponding  credit.  The  goods  were  purchased 
from  John  Brown.  Therefore  he  receives  a  credit  of  S32.  These 
two  entries  are  to  be  posted  to  their  proper  accounts.  The 
merchandise  that  has  been  received  is  posted  to  the  merchandise 


BOOKKEEPING  ESSENTIALS 


31 


JOURNAL 

1918 

Debit 

Credit 

June 
w 

8 
20 

Merchandise 
John  Brown 
Purchase  of  10  Bu.  Potatoes  @  3*20 

Abram  Morris 
Merchandise 
Sale  of  5  Bu.  Potates  ©  3. 50 

32 
17 

00 
50 

32 
17 

00 

50 

Form  4 

I 

CASH     BOOK 

1918 

Debit 

Credit 

May 
June 

31 
20 

Cash 

Capital 
Cash 

Abram  Morris 
John  Brown 
Cash 

32 
17 
32 

00 
50 
00 

32 
17 
32 

00 

50 

00 

Form  5 

I 

1                                             '                      '            -  ■ '         '■■' 

(Ledger) 

Merchandise 

Date 
1918 

Items 

Pol. 

Debit 

Date 
1918 

Items 

Fol. 

Credit 

June 

8 

10  Bu. 

Potatoes 

- 

JO 

32 

00 

June  20 

Sale  5  Bu. 
Potatoes 

Jo 

17 

50 

Form 

6 

(Ledger) 

JOHN     BROWN 

Date 
1918 

Items 

Pol. 

Debit 

Date 
1918 

Items 

Fol. 

Credit 

June 

20 

Cash 

i  _ 

C.B 

32 

00 

June  20 

Pur.  10  bu. 
Potatoes 

J. 

32 

00 

Form 

32 


BUSINESS  ACCOUNTANCY 


(Ledger) 

A.  Morris 

Date 
1918 

Items 

Fol, 

Debit 

Date 
1918 

Items 

Pol. 

Credit 

June 

8 

Sale    5  BU. 
Potatoes 

Jo 

17 

50 

June 

20 

By  Cash 

CB 

17 

50 

Form 

8 

Cash 

Date 
1918 

Items 

Pol. 

Debit 

Date 
1918 

Items 

Fol. 

Credit 

May 

June 

31 
20 

Capital 
A.  Morrie 

CB 
CB 

32. 
17. 

00 
50 

June 

20 

J.  Brown 

CB 

32. 

00 

Form 

9 

! 

Capital 

Date 
1918 

Items 

Pol. 

Debit 

Date 
1918 

Items 

Pol. 

Credit 

- — -» 

May 

31 

Cash 

32 

00 

Form 

10 

1. 

Trial  Balance 

Debit 

Credit 

Merchandise 
Cash 

Total 

14 
17 

50 
50 

Capital 

Total 

32 

00 

32 

00 

32 

00 

Form  11      I 

account  in  the  ledger;   and  the  credit  of  John  Brown  is  posted 
to  that  gentleman's  account. 

The  sale  to  A.  Morris  receives  its  initial  record  in  the  journal. 
As  credit  has  come  into  the  business  through  the  sale  of  5  bushels 
of  potatoes  to  the  value  of  $17.50,  Mr.  Morris  is  debited  in  the 


BOOKKEEPING  ESSENTIALS  33 

journal  by  that  amount,  and  the  merchandise  from  which  his 
purchase  was  taken  is  credited  with  a  like  amount.  These  are 
then  posted  to  the  ledger  accounts.  The  merchandise  having 
been  moved,  that  account  receives  $17.50  credit,  and  Morris, 
being  indebted  in  the  sum  of  $17.50,  appears  in  the  ledger  as  an 
"account  receivable"  for  that  sum. 

The  receipt  of  cash  from  A.  Morris  of  the  amount  of  his  bill 
and  also  the  payment  to  John  Brown,  are  treated  in  exactly  the 
same  manner  as  the  former  transaction  of  merchandise,  the 
initial  entries  going,  however,  into  the  cash  book  and  from 
the  cash  book  are  posted  to  the  cash  account  in  the  ledger. 
The  detail  accounts  of  the  sums  due  to  and  from  the  individuals 
are  closed  out  by  these  two  transactions. 

The  month  having  ended  (or  whatever  period  for  closing  the 
books  may  be  chosen)  a  trial  balance  is  taken  off,  which  would 
appear  as  in  Form  11. 

This  balance  shows  that  there  should  be  merchandise  on  hand 
to  the  value  of  $14.50,  but  an  actual  inventory  being  taken,  it  is 
discovered  that  the  value  of  the  merchandise  on  hand  is  only 
$12.80.  There  is  therefore  a  loss  of  $1.70,  the  reason  for  which 
is  not  disclosed.  An  examination  of  the  ledger  accounts,  how- 
ever, shows  that  the  loss  must  be  there — merchandise  has  been 
removed  without  a  record  having  been  made. 

In  the  single  entry  system,  the  only  fact  disclosed  was  that 
$1.70  had  in  some  way  been  lost,  but  by  reason  of  the  double 
entry  system  that  missing  item  is  traced  directly  to  the  with- 
drawal of  merchandise.  This  leads  to  an  inquiry,  which  will 
bring  out  the  sales  to  Jones  and  James  in  the  sum  of  $1.75  each, 
which  the  clerk  had  forgotten  to  record. 

This  loss  has  been  traced  by  reason  of  the  nominal  account 
of  merchandise  contained  in  the  ledger.  The  ledger  controls 
all  of  the  detail  accounts,  and  permits  either  the  exact  location 
or  the  segregation  of  an  error. 

The  Ledger.  A  double  entry  system  may  be  compared 
with  a  tree,  the  trunk  of  which  is  the  ledger  and  the  branches  the 
other  records,  which  in  number  and  in  size  depend  upon  the  size 
of  the  business,  the  variety  of  its  effort  and  the  number  of  divi- 
sions which  the  larger  or  more  complex  business  requires. 

Because  in  double  entry  every  debit  must  have  a  credit, 
every  posting  into  the  ledger  on  the  debit  side  of  some  account  is 
offset  by  the  posting  of  a  like  amount  to  another  account.    Con- 


34  BUSINESS  ACCOUNTANCY 

sequently,  it  is  from  the  ledger  that  a  trial  balance  is  taken. 
The  books  are  considered  as  substantially  correct  if  the  total 
of  the  ledger  debit  balances  agrees  with  the  total  credit  balances. 

Why  "Subsidiary  Ledgers"  are  Necessary.  The  larger 
the  business,  the  fewer  are  the  items  in  the  ledger;  it  would 
become  unwieldy  were  all  the  items  carried  thereto.  Instead 
are  opened  what  are  termed  " subsidiary  ledgers";  these  are 
detailed  accounts,  only  the  totals  of  which  are  carried  forward 
to  a  general  ledger.  For  instance,  take  the  merchandise  account ; 
in  the  simple  example  above  given,  this  account  carried  both 
the  purchases  and  the  sales  of  merchandise,  and  only  after  the 
inclusion  of  a  plrysical  inventory  was  the  profit  determined. 
In  the  larger  concern,  the  purchases  and  the  sales  should  be  car- 
ried in  different  accounts  from  which  could  be  determined  the 
amount  of  purchases  or  sales  through  any  given  period. 

Business  today  is  complex;  in  many  lines,  the  ordinary  man 
must  alwajrs  know  where  he  stands;  he  must  know  what  is 
selling  best — it  is  not  enough  to  know  sales  totals.  But  if  the 
purchases  and  sales  of  merchandise  are  carried  wholly  in  the 
merchandise  account,  he  cannot  make  a  sales  analysis  without 
infinite  labor  in  a  business  of  even  moderate  size.  A  large 
concern  may  easily  make  1,000  purchases  a  day,  and  10  times 
that  number  of  sales. 

Obviously,  a  single  inclusive  account  of  all  this  merchandise 
would  be  so  cumbersome  that,  unless  by  great  effort,  it  would 
give  no  aid  whatsoever  to  an  intensive  study  of  lines,  and  it 
would  not  even  be  correct  in  total  without  considerable  adjust- 
ment. Neither  the  purchases  nor  the  sales  in  this  one  account 
would  show  the  goods  that  had  been  returned  by  one  or  the  other 
of  the  parties.  Therefore  the  merchandise  account  is  now 
commonly  divided  into  whatever  sections  the  business  demands. 
The  division  totals  then  form  intelligible  records.  For  instance, 
a  druggist  would  find  it  desirable  to  make  separate  divisions 
for  his  patent  medicines,  candies,  stationery,  and  so  on.  This 
division  would  show  him  at  a  glance  the  line  which  was  not 
doing  well,  and  lead  him  to  improve  the  stock  in  that  line  or  to 
force  selling  through  window  displays  or  other  advertising,  or  to 
withdraw  the  line  from  sale. 

It  is  in  the  subdivision  of  accounts  and  consequent  analysis 
that  the  greatest  accounting  progress  has  been  made;  without 
such  subdivision  big  business  could  not  be  conducted;   for  big 


BOOKKEEPING  ESSENTIALS  35 

business  travels  on  such  a  narrow  margin  of  profit  and  depends 
so  much  upon  rapid  turnover,  that  every  fact  must  be  known 
in  detail — and  at  once. 

It  is  advisable  not  only  to  subdivide  purchases  of  material 
which  are  to  be  again  sold  in  some  form  or  other,  but  also  to 
subdivide  and  properly  distribute  purchases  of  that  which  aids 
in  doing  business — fixtures,  machinery,  and  the  like.  The 
larger  the  business,  the  more  necessary  the  subdivisions. 

Some  Modern  Changes  in  Method.  Let  us  instance  a 
purchase  by  a  small  company  of  a  few  articles  of  furniture  and 
fixtures.  If  the  purchase  is  made  for  immediate  cash,  furniture 
and  fixtures  are  debited  because  the  articles  came  to  the  com- 
pany, and  cash  is  credited  because  cash  of  a  similar  value  has 
gone  out.  Both  cash  and  furniture  and  fixtures  are  posted  to 
the  ledger,  the  former  to  the  credit  of  its  account  and  the  latter 
to  the  debit.  Therefore,  upon  the  debit  side  of  the  ledger,  there 
appears  the  information  that  furniture  and  fixtures  of  a  certain 
value  have  been  purchased  and  exist. 

In  a  small  company  containing  one  office,  the  above  informa- 
tion is  sufficient,  and  such  additions  as  may  be  made  to  the 
fixtures  from  time  to  time  can  be  added  to  the  same  account, 
that  account  therefore  always  depicting  the  cost  of  the  articles 
purchased.  In  a  large  corporation  maintaining  a  large  number 
of  branch  offices,  the  information  that  it  possesses  furniture  and 
fixtures  of  a  certain  value  would  not  give  desired  information 
to  the  executives.  One  hundred  thousand  or  a  million  dollars' 
worth  of  furniture  carried  in  one  account  will  not  give  the  reader 
of  the  statement  or  the  student  of  the  account  much  of  a  concep- 
tion as  to  whether  the  sum  is  large  or  small,  or  where  the  property 
exists,  unless  the  student  has  the  inclination  and  the  time  to 
analyze  each  entry  added  to  the  account,  which  may  at  times 
carry  him  into  a  study  of  transactions  covering  many  years. 

Big  companies  such  as  the  United  States  Steel  Corporation, 
the  Standard  Oil  Company,  the  American  Bridge  Company,  and 
others,  would  probably  carry  a  furniture  and  fixtures  register. 
In  this  would  appear  separate  pages  for  each  city  or  each  office, 
and  occasionally  a  subdivision  of  the  office  to  show  the  type  of 
furniture  or  fixtures.  The  purchases  are  posted  in  detail  to  the 
office  affected,  and  only  the  total  carried  to  the  general  ledger; 
but  to  insure  accounting  accuracy,  the  total  of  the  subledger  or 
furniture  and  fixtures  record  would  have  to  agree  with  the  total 


36  BUSINESS  ACCOUNTANCY 

of  the  single  account  in  the  general  ledger.    The  account  in  the 
general  ledger  would  become  the  controlling  account. 

It  is  in  the  above  fashion  that  controlling  accounts  are  created, 
and  they  can  be  multiplied  to  almost  any  extent.  In  a  large 
business,  one  clerk  can  be  given  a  certain  section  of  the  work, 
and  the  company's  principal  accountant,  who  maintains  the 
general  ledger,  can  check  the  accuracy  of  his  subordinate  by 
requiring,  periodically,  the  total  of  the  subsidiary  accounts. 
This  total  must  agree  with  the  controlling  account  of  the  gen- 
eral ledger,  and  that  general  ledger,  in  turn,  is  proved  correct 
or  in  error  by  a  trial  balance. 

The  Main  Functions  of  the  General  Ledger.  These  are 
the  two  main  functions  of  the  general  ledger.  In  a  small  busi- 
ness, it  is  a  repository  for  all  entries,  and  in  large  business,  for 
the  totals  of  all  entries,  the  details  appearing  upon  subsidiary 
books.  In  both  cases,  either  as  individual  figures  or  as  totals, 
the  aggregate  of  all  entries  finds  its  way  into  the  general  ledger. 

The  general  ledger  is  indispensable  to  business.  It  is  prob- 
ably the  only  book  that  time  has  not  greatly  changed  in  form. 
The  general  ledger  of  the  man  who  runs  a  little  garage  need 
differ  only  in  volume  of  the  accounts  from  that  of  the  Standard 
Oil  Company,  from  which  he  buys  his  gasoline. 

Of  the  basic  books,  aside  from  the  general  ledger,  there  are 
two  others  which  are  practically  indispensable,  though  their 
form  varies.  One  is  the  cash  book,  and  the  other  is  the  day 
book  or  journal.  Of  the  two,  the  cash  book,  in  principle  at  least, 
is  less  subject  to  variation.  It  chronicles  only  such  transactions 
as  have  to  do  with  cash  received  or  disbursed.  The  day  book  or 
journal  is,  among  larger  business,  falling  into  disuse.  It  was 
originally  conceived  to  handle  all  entries  that  could  not  be  han- 
dled through  the  cash  book,  and  the  entries  in  both  books  were 
posted  to  the  ledger. 

At  one  time,  the  day  book  or  journal — and  frequently  both 
were  maintained — was  used  to  record  purchases,  sales,  and  the 
closing  entries  of  the  year.  It  was  also  made  the  medium 
through  which  errors  were  corrected  and  allowances  entered 
to  the  credit  of  customers. 

A  purchase  was  entered  upon  the  journal  by  crediting  the 
individual  from  whom  purchased  and  by  charging  the  material 
either  to  the  material  account  affected  or  to  an  account  known 
as  "merchandise,"  into  which  practically  everything  that  was 


BOOKKEEPING  ESSENTIALS  37 

a  part  of  the  business  of  selling  and  buying  was  thrown.  The 
result  was  a  balance,  but  also  an  utter  lack  of  information  beyond 
the  bare  profit  or  loss  that  resulted  at  inventory-taking  time. 

The  Passing  of  the  Day  Book.  The  day  book  was  orig- 
inally made  to  record  sales,  the  individual  to  whom  the  sale 
was  made  being  debited  and  the  merchandise  account  credited. 
As  a  rule,  the  detail  of  the  sale  was  entered  so  that  the  day  book 
became  a  long  list  of  copies  of  invoices.  The  inefficiency  of 
such  a  method  of  recording  can  easily  be  grasped  when  we  con- 
sider the  thousands  of  bills  sent  out  in  one  day. 

Copying  each  bill  in  longhand  in  a  day  book  makes  the 
task  almost  prohibitive  from  the  standpoint  of  clerical  expense. 
The  day  book  has  given  way  to  carbon  copies  of  invoices  or  to 
other  mechanical  means,  by  which  most  sales  are  recorded,  and 
at  this  writing  the  day  book  is  almost  as  extinct  as  the  dodo. 

In  themselves,  the  books  mentioned  constitute  an  entire 
set  with  which  any  company  could  today  start  business.  They 
would  give  accurate  results  from  an  accounting  standpoint,  but 
they  would  convey  very  little  information.  Therefore,  although 
the  general  ledger  still  exists  as  the  final  resting  place  of  entries, 
modern  business  has  devised  one  record  after  another  to  reduce 
the  multitudinous  entries  required  by  the  old-fashioned  books. 

The  various  elaborations  and  extensions  of  the  modern 
systems,  as  well  as  the  labor-saving  cuts,  will  be  taken  up,  each 
in  its  proper  place,  in  succeeding  chapters. 


CHAPTER  IV 

OPENING  THE  BOOKS 

A  BUSINESS  should  grow  into  its  records;  no  accountant, 
however  experienced,  is  justified  in  planting  a  complete 
L  set  of  records  on  a  concern  before  it  has  started  operations. 
We  may  think  that  we  know  all  that  will  be  required,  but  I  find 
that  each  business  has  its  own  personality,  and  that  it  is  gen- 
erally better  practice  to  start  only  with  the  essential  records, 
and  then  amplify  them  as  trade  increases.  This  applies  both 
to  the  general  trading  accounts  and  to  the  special  partnership  or 
corporation  accounts. 

The  best  modern  bookkeeping  practice  abhors  rigid  "sys- 
tems," because  fitting  a  business  to  a  system  always  results  in 
waste.  This  is  not  to  say  that  fundamentals  change — they 
do  not.  But  systems  are  largely  concerned  with  details,  and 
the  details — the  short  cuts  and  the  labor-saving  devices — will 
change  with  the  particular  work  in  hand.  It  is  quite  simple 
then  that  by  understanding  the  end  which  you  wish  to  attain, 
you  can  take  or  leave  that  which  you  find  essential  or  non- 
essential in  your  affairs. 

Fundamentals  Apply  Equally  to  Small  and  Big  Business. 
Whatever  may  be  the  nature  or  the  size  of  your  business,  the 
fundamentals  of  accountancy  will  always  apply.  Do  not  be 
misled  into  the  thought  that  the  big  corporation  is  proceeding 
upon  a  different  principle  from  the  correctly  accounted  small 
retail  store;  both  are  following  precisely  the  same  maxims  and 
the  only  differences  are  in  detail — the  big  business  has  a  hundred 
accounts  where  the  small  one  has  a  single  account.  Possibly 
big  business  cannot  learn  much  from  small  accountancy,  but 
undoubtedly  the  man  with  hundreds  of  dollars  where  the  cor- 
poration has  thousands,  can  learn  much  of  the  right  method 
from  his  big  brother.  The  large  corporations  have  the  money 
to  buy  expert  assistance  in  forming  their  accountancy,  and  their 
procedure  is  always  worth  study. 

38 


GETTING  STARTEL  RIGHT  39 

If  you  keep  in  mind  the  fundamentals,  you  can  possibly  pick 
out  something  for  your  own  use  from  the  practice  of  almost  any 
well-managed  enterprise.  The  idea  prevails  that  adaptation 
may  be  made  only  from  examples  taken  from  enterprises  of  like 
kind  and  size.  If  that  notion  had  been  universal,  business  would 
never  have  progressed.  The  men  who  become  successful  are 
those  who  know  a  good  thing  wherever  and  however  they  see  it. 

The  Necessary  Records  at  the  Start.  The  books  which 
the  average  business  will  absolutely  require  at  its  inception  are 
but  three  in  number — journal,  cash  book,  and  ledger. 

Let  us  look  at  them  in  use — as  in  actual  business  life.  Take 
a  hypothetical  concern  which  we  shall  call  the  Specialty  Com- 
pany. It  will  begin  as  a  partnership  and  then  change  into  a 
corporation — which  is  the  usual  progress  of  commercial  activity. 
We  shall  have  initially  only  these  three  books  of  record. 

It  should  be  observed,  however,  that  because  an  enterprise 
is  in  its  infancy,  it  need  not  also  select  methods  out  of  the  infancy 
of  bookkeeping.  The  illustration  is  so  shaped  only  because  of 
a  desire  to  contrast  the  primitive  methods  with  the  better  and 
more  advanced;  in  actual  practice,  one  would  probably  start 
at  the  point  of  development  which  seems  best  suited  for  the 
then  needs  of  the  business,  with  the  thought  always  in  mind 
that  trading  and  not  bookkeeping  is  the  primary  object  of 
venturing  into  commerce. 

THE  SPECIALTY  COMPANY 

George  Robinson,  Henry  Corey,  and  Peter  Starr  each  invest 
$10,000  in  a  partnership  venture  under  a  written  agreement 
by  which  profits  and  losses  are  to  be  shared  alike,  interest  on 
the  investment  at  6%  is  to  be  allowed,  but  no  salaries  are  to  be 
drawn  until  the  business  has  proved  itself.  They  will  manu- 
facture and  sell  specialties. 

The  initial  entry  is  the  recording  of  the  cash  received  as 
having  come  into  the  business  and  the  opening  of  the  proprietors' 
accounts,  giving  them  credit  for  their  individual  investments. 
The  entry  will  be  made  in  the  cash  book  as  shown  in  Form  Si. 

Under  these  items  will  be  placed  a  note  setting  forth  the 
essential  facts  of  the  partnership  agreement,  and  it  is  recom- 
mended that  the  note  be  signed  by  all  the  parties  and  witnessed 
by  the  bookkeeper  or  accountant.  The  abstract  in  the  present 
case  will  be  as  follows: 


40 


BUSINESS  ACCOUNTANCY 


To  record  the  investment  of  the  following  gentlemen  in  the  Specialty 
Company,  in  accordance  with  a  copartnership  agreement  entered  into  by 
Messrs.  Robinson,  Corey,  and  Starr  as  of  January  2,  1918;  whereas  no  sala- 
ries are  to  be  drawn  until  the  business  warrants  such  withdrawals,  but  interest 
at  6%  is  to  be  allowed.    This  agreement  is  considered  binding  on  all  parties. 


CASH        BOOK 


1918 


Debit 


Credit 


Jan. 


Cash 


30 


George  Robinson,  Prop.  ao. 
Henry  Corey,  "  H 

Peter  Starr,  "         " 


00C    00 


00C    00 


ooa 


oo 


00C    00 


It  is  highly  important  that  the  accountancy  facts  of  a  part- 
nership be  placed  upon  the  books  with  the  initial  entry.  The 
presence  of  this  guide  makes  impossible  a  satisfactory  explana- 
tion of  any  subsequent  change  in  the  manner  of  distribution 
between  the  partners,  without  a  further  formal  undertaking. 
In  many  cases,  where  all  of  the  partners  have  not  been  equally 
diligent,  the  active  partners  have  drawn  money  from  the  busi- 
ness in  violation  of  the  agreement.  The  contemporaneous 
interpretation  of  an  instrument  by  its  signatories  is  the  highest 
evidence  of  what  they  really  intended.  Thus,  were  the  original 
agreement  lost,  the  distribution  on  the  books  would  probably 
control  its  oral  reconstruction.    , 

As  the  years  pass,  many  disputes  may  arise  in  partnership 
affairs  and  the  books  should,  insofar  as  possible,  be  self-con- 
tained and  without  need  of  explanation  from  extraneous  sources. 

Regarding  the  Capital  Transactions.  The  next  entries 
after  the  formal  record  of  the  capital  contributions,  will  be  the 
capital  transactions.  These  are  entered  in  a  cash  book  with 
a  ruling  similar  to  the  journal.  It  is  assumed  that  the  more 
elaborate  and  better-designed  cash  book  has  not  been  obtained 
to  record  these  essential  details. 

The  cash  book  and  journal  entries  are  shown  in  Forms  S2 
and  S3. 

These  items  are  now  posted  to  their  proper  accounts  in  the 
ledger,  the  pages  of  which  take  on  the  appearance  of  those  shown 
in  Forms  S4  to  S14  inclusive. 


GETTING  STARTED  RIGHT 


41 


CASH   BOOK 

1918 

Debit 

Credit 

Jan. 

2 

Cash 

30 

000 

00 

George  Robinson,  Prop.  Ac. 
Henry  Corey,      "    " 
Peter  Starr,      "    " 

10 
10 
10 

000 
000 
000 

00 
00 
00 

5 

Buildings  and  Equipment 
Furniture  and  Fixtures 

Cash 

(which  records  the  purchase  of 
property  for  cash) 

18 

500 
900 

00 
00 

19 

400 

00 

11 

Materials  and  Supplies 
Cash 

(wherein  goods  for  resale  or  man- 
ufacture are  bought  for  cash) 

6 

100 

00 

6 

100 

00 

27 

Cash 
Bond  and  Mortgage 
(to  raise  money,  a  mortgage  has 
been  given) 

10 

000 

00 

10 

000 

00 

31 

Payroll 
Cash 
(being  the  payment  of  wages) 

950 

00 

950 

00 

Form  S- 

31 

2I 

Expense 
Cash 

(recording  other  disbursements  for 
general  items,  such  as  rent,  tele- 
phone and  so  fortk) 

325 

00 

325 

00 

JOURNAL 

1918 

Debit 

Credit 

Jan. 
FormS 

31 
5-3 

Interest  on  Investment 

George  Robinson 

Henry  Corey 

Peter  Starr 
(Whereby  the  proprietors  are  credited 
with  their  6%) 

150 

)0 

50 
50 
50 

00 
00 
00 

42 


BUSINESS  ACCOUNTANCY 


(Ledger) 

Peter  Starr 

Date 

I  terns 

Pol. 

1    Debit 

Date 
191B 

Items 

Fol. 

Credit 

Jan. 

■ 

2 

31 

Investment 
Interest 
on  Inv. 

10 

000 
5C 

00 
00 

Form 

S- 

4 

Eond   and  Mortgage 

Date 

I  terns 

Fol. 

Debit 

Date 
lQlfi 

Items 

FoL 

Credit 

FormS- 

r\ 

Jan. 27 

Cash 

10 

OOC 

00 

Payroll 

' 

Date 

191S 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Jan. 
Form 

31 
S- 

Cash 
B  1 

k 

950 

00 

Expense 


Items 


Fol. 


Debit 


Date 


Items 


Fol  J 


Credit 


Cash 


325 


00 


Interest  on  Investment 

Date 

1918 

I  terns 

Fol. 

— 
Debit 

Date 

Items 

Fol. 

Credit 

Jan. 

— 
31 

G.  Robinson 
Peter  Starr 
Henry  Corey 



50 
50 
50 

00 

00 
00 

Form 

s- 

n 

GETTING  STARTED  RIGHT 


43 


Cash 


Date 
1918 


Items 


Fol, 


Debit 


Date 
1918 


Items 


Fol. 


Credit 


Jan.  2 


27 


Feb. 


G.  Robinson 
Henry  Corey 
Peter  Starr 
Bond  and  Mtg, 

Balance 


000 


225  OC 


000  OC 
000  OC 
000  0C 
000  0C 


Jan 


00 


Bldg.  and 

Equipment 

Furn .  and 

Fixtures 

Mat'l  and 

Supplies 

Payroll 

Expense 

Balance 


18 


500 

900 

100 
950 
325 
225 


000 


00 


Buildings  and  Equipment 

Date 
1918 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Jan. 

5 

Buildings  and 
Equipment 

18 

500 

00 

Form 

S-] 

oI___ 

Furniture  and  Fixtures 

Date 
1918 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Jan. 

5 

By  Cash 

900 

OC 

Form 

S- 

771 

Materials  and  Supplies 

Date 
1918 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Jan. 

11 

Purchased 

6 

100 

00 

Form 

S-l 

2l 

44 


BUSINESS  ACCOUNTANCY 


George  Robinson 

Date 

Items 

Fol. 

Debit 

Date 
1918 

Items 

FolJ 

Credit 

' 

Jan. 

2 
31 

Investment 
Interest 
on  Inv. 

10 

000 
50 

00 
00 

Form 

S-l 



3  ( 

Henry  Corey 

Date 

Items 

Fol. 

Debit 

Date 
1918 

Items 

Fol. 

Credit 

Jan. 

2 

31 

Investment 
Interest 
on  Inv. 

10 

000 
50 

00 
00 

Form 

S-l 

71 

It  is  next  in  order  to  construct  a  trial  balance  from  the  gen- 
eral ledger  accounts,  as  of  January  31.  The  method  followed 
is  illustrated  in  Form  S15. 


Trial  Balance 


Date!  January  31,  lQlfi 


Debit 


Credit 


Cash  on  Hand 

Buildings  and  Equip- 
ment 
Furniture  and  Fixtures 
Materials  and  Supplies 

Payroll 

■Expense 

Interest  on  Investment 


Total 


225 


500 
900 
100 
950 
325 
150 


00 


00 


G.  Robinson,  Invest- 
ment 

Henry  Corey,  " 
Peter  Starr  ■ 
Bond  and  Mortgage 


Total 


A0 


050 

050 
050 
000 


150 


00 


When  More  Money  Is  Needed.  Having  examined  their 
trial  balance,  the  partners  arrive  at  the  conclusion  that  they 
will  need  more  money  to  do  the  business  which  they  see  ahead. 
Being  forehanded  men,  they  decide  to  anticipate  the  require- 
ments of  finance.  They  have  already  borrowed  on  bond  and 
mortgage  to  as  large  an  amount  as  their  property  will  carry. 
The  new  money  is  needed  for  capital  requirements,  and  hence 


GETTING  STARTED  RIGHT 


45 


cannot  properly  be  borrowed  on  a  current  obligation — it  will 
not  be  money  that  can  be  paid  out  of  the  profits  without  seriously 
interfering  with  the  steady  progress  of  the  business.  Hence 
they  decide  to  interest  new  money.  They  might  search  for  a 
new  partner,  but  four  owners  are  too  many  in  a  small  business. 
In  addition,  it  is  always  more  difficult  to  have  an  outsider  invest 
through  partnership  participation  than  through  stock  owner- 
ship, because  a  partner,  unless  taken  in  under  a  special  or  limited 
form,  is  personally  liable  for  all  the  debts  of  the  association  in 
the  event  of  bankruptcy,  while  a  stockholder  in  a  corporation 
has  no  personal  liability  (except  in  some  states  by  statutes  which 
impose  liabilities  upon  the  stockholders  for  certain  transactions 
in  certain  kinds  of  corporations).  Therefore,  they  find  a  buyer 
for  the  stock  which  they  intend  to  issue. 

To  record  the  necessary  transactions,  together  with  interest 
accruals,  and  so  on,  the  entries  shown  in  Forms  S16  and  S17 
were  made. 


JOURNAL 


1918 


Debit 


Credit 


Feb, 


28 


28 


28 


28 


Capital  Stock  Unissued 
Capital  stock  Authorized 
Common  Capital  Stock  Authorized 
at  directors'  meeting  held  Feb.  21, 

1918 

Interest  on  Investment 
George  Robinson 
Henry  Corey 
Peter  Starr 

(Whereby  the  second  month's  interest 
is  credited  to  the  proprietors) 

George  Robinson,  Investment  Account 
Henry  Corey,         °       ° 
Peter  Starr,         ■       • 
Capital  Stock  Unissued 
(Whereby  the  former  partners  take 
stock  for  their  capital  investment, 
ao  indicated  by  their  ledger  ac- 
counts. Note  that  the  original 
capital  has  been  augmented  by  ao* 
orued  interest) 

Interest 
Interest  Accrued  on  mortgage 

Payable,  1  month  at  % 
(This  is  to  place  on  the  books  an 

indebtedness  to  those  from  whom 

money  was  borrowed  on  the  mortgage 

given  on  property) 


100 


Form  S-16 


000 


150 


100 
100 
100 


41 


00 


00 


100 


30 


67 


000 


300 


41 


00 


00 


67 


46 


BUSINESS  ACCOUNTANCY 


CASH     BOOK 

Sate 

1918 

Debit 

Credit 

Tel), 

28 

1                  ..                    _ 

Payroll 

Expense 

Materials  and  Supplies 

Cash 
(Being  ordinary  transactions  of  the 

1 
2 

217 

457 
350 

50 
50 
00 

4 

025 

00 

business  the  same  as   in  January, 
The  Payroll,  Expense  Items,  and 
Material  and  supply  purchases, 
vers  all  settled  by  cash  payments 
Zn  actual  practice,   the  items 
shown  here  would  probably  be  di- 
vided into  many  small  entries, 
such  as  four  weekly  payrolls, 
several  dozen  expense   items,   and 
a  large  number  of  material  and 
supply  bills.     V/e  show  the  aggre- 

FormS 

-17 

The  results  of  the  additions  of  the  February  transactions  are 
reflected  in  the  ledger  accounts.  These  are  riow  as  shown  in 
Forms  S18  to  S31  inclusive. 


Cash 

Date 

1918 

Items 

Fol. 

Debit 

Date 
1918 

Items 

Fol. 

Credit 

Feb. 
Mar. 

1 
1 

Balance 
Balance 

13 

225 

00 

Feb. 

28 

Sundries 
Balance 

4 
9 

025 

200 

00 

00 

13 

225" 

DO 

13 

225 

00 

9 

200 

00 

Form 

S-1 

8   1 ■ 

Buildings   and  Equipment 

Date 
1918 

I  terns 

Fol. 

Eebit 

Date 

Items 

Fol. 

Credit 

Feb. 

1 

Balance 

18 

500 

00 

Form 

S- 

19  ^ -J 

GETTING  STARTEDRIGHT 


47 


Furniture  and  Fixtures 

Date 
1918 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Feb. 

1 

Balance 

900 

00 

Form 

S-: 

"w     

Materials  and  Supplies 


Date 
1918 


Items 


Fol 


Debit 


Date 


Items 


Fol. 


Credit 


Feb. 


Balance 
Purchased 


FormS-21 


IOC 
350 


George  Robinson 

Date 
1918 

Items 

Fol. 

Debit 

Date 
1918 

Items 

Fol. 

Credit 

Feb. 

28 

Capital  Stock 

10 
10 

100 
1O0 

00 
00 

Feb. 

1 
28 

Interest 
on  Inv, 

10 
10 

050 

50 

100 

00 
00 
00 

Form 

S-i 

■2I—  ... . 

Henry  Corey 

Date 
1918 

Items 

Fol. 

Debit 

Date 
1918 

Items 

Fol. 

Credit 

Feb. 

28 

Capital  Stock 

10 

10 

100 
100 

00 
00 

Feb. 

1 
28 

Interest 
on  Inv. 

10 
10 

050 

50 

100 

00 
00 
00 

Fom 

1S 

23  L — 1 

48 


BUSINESS  ACCOUNTANCY 


Peter  Starr 

Date 
1918 

I  terns 

Fol. 

Debit 

Date 
1918 

Items 

Fol. 

Credit 

Feb. 

28 

Capital  Stock 

10 
10 

100 
100 

00 
00 

Feb. 

1 
28 

Interest 
on  Inv. 

10 
10 

050 

50 

100 

00 
00 
00 

Form 

S- 

ill 

1.  1'  I      n 


Bond  and  Mortgage 


Date 


Items 


Fol, 


Debit 


Date 
1918 


Jan. 27 


Items 


Fol. 


Credit 


10  000  00 


Interest  Acorued 

Date 

Items 

Fol. 

Debit 

Date 
1918 

Items 

Fol. 

1 

Credit 

Feb. 

2£ 

On  Mort- 
gage 

1 

-•». 

41 

67 

Forn 

1  S 

9fi  i            1 

Capital  Stock  Unissued 

Date 
1918 

I  terns 

Fol. 

Debit 

Date 
1918 

Items 

Fol. 

Credit 

Feb. 
Mar. 

28 

1 

1,000   shares 
$100  each 

Balance 

IOC 

000 

00 

Feb. 

28 

O.Robinson 
Henry 

Corey 
Peter 

Starr 
Balance 

10 

10 

10 
69 

100 

1O0 

100 
700 

00 

00 

00 
00 

100 

00( 

00 

LOO 

000 

00 

69 

70( 

00 

Forn 

iS- 

97  1 

GETTING  STARTED  RIGHT 


49 


Capital  Stook  Authorized 

Date 

I  terns 

Fol, 

Debit 

Date 
1918 

Items 

Fol, 

Credit 

| 

Feb. 

28 

1,000 

shares 
$100  each 

LOO 

00c 

00 

Form  S- 

9.R    } 

Payroll 

Date 
1918 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Jan. 
Feb. 

11 

Cash 
11 

OB    1 
CB   2 

1 

950 
217 

00 
50 

Fonr 

S- 

?q  1 

Expenses 

Date 
1918 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Jan. 
Feb. 

31 

28 

Cash 

CB   1 
CB   2 

325 
457 

00 
50 

Forn 

1  S 

-30    V 

Interest 

Date 
1918 

Items 

Fol. 

Debit 

Date 

Items 

Pol. 

Credit 

Jan. 
Feb. 

31 
28 
28 

On  Investment 
11                « 

Mortgage 
Payable 

150 

150 

41 

00 
00 

67 

Forn 

iS 

in 

The  journal  entries  were  made  on  the  assumption  that  the 
par  value  of  the  capital  stock  is  $100  per  share.  It  is  self-evident 
that  any  par  value  may  be  treated  in  the  same  manner. 

Of  late  years,  several  of  the  states  have  admitted  a  new  form 
of  stock  which  has  not  an  arbitrary  par  value.  This  is  known 
as  stock  of  "no  par  value."  Its  worth  is  determined  by  the 
net  worth  of  the  corporation  or,  if  sold,  by  the  amount  received 


60 


BUSINESS  ACCOUNTANCY 


therefor.  If  there  were  100  shares  of  stock  of  no  par  value 
and  they  sold  for  SI, 000,  the  entry  would  be  according  to  the 
form  as  shown  in  Form  S32. 


CASH      BOOK 

Date 
1918 

Debit 

Credit 

Feb. 

28 

Cash 

Stock  Account 
Sale  of  100   shares  of  stock  of  no 
par  value   for  $1,000 

1 

000 

00 

1 

000 

00 

Forn 

i  S- 

71    \ 

In  the  transition  from  the  partnership  to  the  corporation, 
the  entries  show  the  credits  to  the  individual  accounts  for  the 
accrued  interest  on  the  investment,  and  these  partnership 
investment  accounts  have  been  closed  out  by  the  issue  of  capital 
stock.  The  partnership  agreement  no  longer  exists,  and  the 
conduct  of  the  business  now  depends  upon  the  organic  law  of 
the  corporation  which  is  expressed  in  the  statutes  of  the  state 
of  incorporation,  the  charter  of  the  company,  and  its  by-laws. 
These  entries  have  been  posted  to  the  ledger  accounts  to  show 
the  closing  of  the  partners'  accounts  and  the  establishing  of  the 
two  new  accounts  which  represent  the  capital  stock.  After 
all  these  transactions  are  recorded,  another  trial  balance  is  given 
as  of  February  28,  1918  (Form  S33). 


Trial  Balance 
Date:        February  28,    19 18 

Debit 

Credit 

Cash  on  Hand 

Buildings  and  Equipment 

Materials  and  Supplies 

Furniture  and  Fixtures 

Payroll 

Expense 

Interest 

Total 

9 
18 

£ 

2 

200 

500 
450 
900 

167 

782 
341 

00 
00 
CO 
00 

50 

50 

67 

Bond  and  Mortgage 

Interest  Accrued 

Capital  Stock; 

Authorized       $100,000 
Unissued                69,700 
Issued 

Total 

10 
30 

000 

41 

300 

00 

67 

00 

4-0 

341 

67 

40 

341 

67 

Form  S-33  I 

This  chapter  deals  with  the  beginning  of  the  partnership 
and  the  change  into  corporate  form.  The  further  history  will  be 
carried  forward  at  the  close  of  each  chapter  on  the  various  phases 
of  business  and  their  proper  and  most  convenient  recording. 


CHAPTER  V 

EFFECTIVE  PURCHASING  METHODS 
AND  RECORDS 

BUSINESS  begins  with  a  purchase.  Therefore  accountancy 
may  be  taken  to  begin  with  the  recording,  in  some  form 
or  other,  of  a  purchase.  We  are  apt  to  think  of  business 
as  consisting  largely  of  selling,  and  sometimes  to  regard  the  steps 
which  lead  up  to  the  sale  as  unimportant.  But  good  business 
starts  with  good  buying  and,  under  normal  economic  conditions, 
there  cannot  be  profitable  merchandising  or  manufacturing  with- 
out good  buying.  Any  accounting  that  makes  for  better  profits 
will  start  with  the  recording  and  regulating  of  purchases. 

Although  sales  may  often  be  found  recorded  in  elaborate 
style,  far  too  little  attention  is  given  to  the  accountancy  of 
buying.  A  well-balanced,  active  stock  is  the  foundation  of 
the  rate  of  turnover — which  is  the  foundation  of  business  profit. 
A  true  grasp  of  the  rate  of  turnover  cannot  be  had  without 
accurate  accounting  of  such  a  nature  that  it  will  not  only  check 
all  purchases,  but  will  keep  them  in  exact  coordination  with 
the  selling  policy  and  the  sales. 

Just  as  an  army  travels  on  its  stomach,  so  does  a  business 
travel  on  its  purchases.  The  buying  may  be  small  in  quantity 
or  in  value  or  it  may  comprehend  thousands  of  articles,  as  in  a 
department  store  or  some  factories;  but,  simple  or  complex, 
this  primary  principle  must  be  kept  in  mind:  Proper  accounts 
furnish  the  reasons  for  and  the  measure  of  buying  and  are  not 
to  be  regarded  merely  as  a  tally  of  what  has  been  bought.  Many 
selling  losses  are  to  be  traced  back  to  bad  buying. 

Hidden  Purchasing  Losses.  Purchasing  losses  may  be 
foimd  in  price  or  quality,  again  they  may  be  in  quantity,  or, 
finally,  they  may  be  traced  to  buying  something  which  is  not 
needed.  Purchases  do  not  stand  alone,  but  reach  out  through 
the  whole  business  and  are  delicately  adjusted  to  its  every  part. 

51 


52  BUSINESS  ACCOUNTANCY 

There  is  nothing  of  "I  buy"  and  "he  sells"  in  well-organized 
establishments. 

Lest  it  may  be  imagined  that  good  buying  must  be  confined 
to  large  business  that  can  have  the  most  suitable  departmental 
division,  let  it  be  said  now  that  every  individual  engaged  in 
commerce  is  divided  into  his  own  different  departments  even 
though  the  transit  from  one  department  to  another  be  but  the 
turning  of  a  few  pages  in  a  book  of  accounts;  in  fact,  the  ideal 
coordination  is  perhaps  attained  when  all  functions  are  com- 
bined in  the  one  person;  but,  because  a  business  of  any  size 
must  have  its  divisions  and  because  functions  must  be  separated 
in  order  that  they  may  be  studied,  I  speak  of  departments. 
I  have  also  used  the  phrase  "purchasing  agent"  rather  than 
"buyer"  or  "merchandise  man"  (the  terms  of  merchandising) 
because  it  is  more  accurate  and  comprehensive,  although  in 
practice  it  is  not  much  employed  outside  of  manufacturing. 

It  is  not  necessary,  it  is  not  desirable,  that  any  concern 
should  load  itself  with  more  employees  than  are  absolutely 
required  for  the  work  in  hand,  but  the  concentration  of  functions 
should  not  lead  to  the  confusion  of  functions.  The  principles 
of  division,  and  not  the  arbitrary  divisions,  are  to  be  applied. 

Comparing  Two  Types  of  Buyers.  A  common — perhaps 
the  most  common — fault  in  buying  is  primarily  to  regard  the 
price  and  secondarily  the  quality  and  then  only  if  the  articles 
prove  to  be  strikingly  bad. 

Contrast  the  profit-making  values  of  these  two  buyers.  A 
year  or  two  ago,  the  management  of  a  factory  in  the  Central  West 
employed  a  new  purchasing  agent.  The  new  man  had  been  a 
salesman  for  20  years  and  "knew  the  game  from  the  ground  up." 
Nobody  could  "put  anything  over"  on  him.  He  proposed  to 
rely  on  his  ability  to  outguess  the  other  fellow. 

He  played  one  salesman  against  another  to  secure  price 
concessions.  His  motto  was  "anything  to  get  the  price  down." 
And  he  succeeded,  for  he  can  exhibit  comparative  figures  of  the 
prices  at  which  commodities  were  bought  before  and  after  the 
beginning  of  his  regime.  With  very  few  exceptions  the  com- 
parison, based  on  price  alone,  shows  in  his  favor. 

When  questioned  as  to  the  quality  of  the  goods  he  purchases 
he  blandly  assures  you  that  it  is  uniformly  higher  than  before 
he  began  to  do  the  buying.  But  go  out  into  the  factory  and  ask 
the  same  question  and  you  get  a  different  answer. 


PURCHASING  53 

The  foreman  of  the  machine  shop  will  show  you  castings 
that  are  so  full  of  sand  holes  and  other  imperfections  and  of 
such  irregular  hardness,  that  many  of  them  have  to  be  dis- 
carded, while  those  that  can  be  machined  wear  out  the  cutting 
tools  and  the  workman's  patience  with  extraordinary  rapidity. 

Drives  are  working  badly  because  of  inferior  belting;  every- 
where one  finds  complaint — even  the  stenographers  in  the  office 
protest  at  the  quality  of  the  carbon  paper.  Could  the  total 
effect  of  the  labor  waste,  the  waste  in  fabrication  and  the  waste 
in  returned  goods  be  traced,  it  would  be  discovered  that  this 
"smart"  agent  is  the  most  expensive  individual  on  the  roll. 

Getting  Down  to  Basic  Buying  Principles.  Another  fac- 
tory took  a  young  man,  some  five  years  ago,  who  did  not  imagine 
that  he  knew  all  about  buying  or  selling.  He  started  on  the 
basis  that  most  sellers  want  to  do  the  square  thing — and  more 
especially  when  they  know  that  acting  otherwise  will  bar  them 
from  future  orders.  Further,  he  took  the  view  that  price  was 
a  question  of  quality  and  lengh  of  service  as  well  as  of  first  cost. 

He  ran  into  his  first  difficulty  when  he  attempted  to  discover 
just  what  service  the  purchases  were  giving;  he  found  that  the 
foremen  and  workmen  were  more  often  guided  by  convictions 
than  by  reason  and  that  their  opinions  were  not  safe  guides. 
He  determined  to  develop  the  facts. 

He  devised  a  system  of  reports  and  records  covering  all  the 
major  supplies,  as  well  as  the  productive  materials  used,  showing 
the  service  rendered  by  practically  everything  consumed  in 
the  plant.  For  example,  every  drive — of  which  there  were 
several  hundred — was  numbered  and  given  a  card  that  held  the 
location,  the  power  transmitted,  the  operating  conditions,  and 
various  other  pertinent  data. 

For  each  belt  used  another  card  was  prepared  on  which  was 
a  description  of  the  belt,  the  price,  the  maker's  name,  the  number 
of  the  drive  on  which  it  was  used,  the  date  put  on,  the  date  taken 
off,  the  production  of  the  machinery  to  which  it  supplied  power, 
the  cost  per  unit  of  production,  the  condition  of  the  belt  upon 
removal — in  short,  every  fact  about  that  belt.  The  essential 
information  was  transferred  from  the  belt  reports  to  the  drive 
cards  and  thus  was  had  a  complete  record  of  the  cost  of  every 
belt  tried  out  in  the  plant. 

As  the  quantity  and  range  of  the  data  increased,  the  buyer 
was  able  to  make  his  purchases  with  an  exact  knowledge. 


54  BUSINESS  ACCOUNTANCY 

What  Exact  Buying  Knowledge  Accomplished.  The 
economies  have  been  astonishing.  Five  years  ago  the  annual 
belting  cost  was  about  817,000.  Last  year  it  was  approximately 
812,000.  This  saving  of  S5.000  was  effected  despite  the  fact  that 
the  average  price  paid  for  belting  increased  50%  and  the  pro- 
duction of  the  factory  increased  "33^%.  Taking  these  two 
points  into  consideration,  it  means  that  the  direct  saving 
amounted  to  over  45%,  while  the  average  length  of  service  was 
nearly  trebled. 

This  increase  in  the  life  of  the  belts  really  has  a  greater 
significance  than  that  represented  by  the  direct  economy,  for  it 
follows  that  the  number  of  shutdowns  for  belt  changes  and 
repairs  has  been  greatly  reduced,  with  a  large  resultant  decrease 
in  the  loss  of  production  due  to  the  stoppage  of  equipment. 

During  the  same  period,  and  by  the  same  means,  the  annual 
cost  of  another  supply  used  in  large  quantities  has  been  reduced 
by  some  825,000. 

Two  or  three  years  ago  a  shortage  existed  in  the  supply  of 
one  of  the  major  productive  materials  used  in  this  plant,  and  it 
was  necessary  temporarily  to  substitute  another  material.  The 
new  article  was  considerably  cheaper,  and  as  far  as  general 
observation  could  determine,  apparently  caused  no  reduction  in 
the  quality  of  the  product.  When  the  supply  of  the  material 
usually  employed  returned  to  the  normal,  and  the  purchasing 
department  was  ready  to  place  an  order  for  it,  the  management 
demanded  to  know  why  it  was  necessary  to  return  to  the  higher- 
priced  article,  and  insisted  that  they  could  save  money  on  the  new. 

What  Comparative  Cost  Figures  Showed.  This  attitude 
had  been  anticipated  by  the  purchasing  agent,  who  had  been 
quietly  collecting  data  for  a  report  on  the  relative  merits  of  the 
two  materials.  Among  other  things,  he  showed  that  while  the 
cheaper  article  was  in  use,  the  waste,  the  quantity  of  the  product 
rejected  by  the  inspection,  and  the  number  of  complaints  from 
customers  materializing  in  returned  goods,  had  all  increased. 

The  most  tangible  result,  however,  had  been  the  increase  by 
nearly  100%  of  the  maintenance  cost  of  the  machinery  on  which 
this  article  was  prepared,  due  to  the  detrimental  effect  of  the 
cheaper  material  on  the  equipment.  This  added  expense  alone 
amounted  to  more  than  double  the  saving  in  first  cost. 

This  broad-minded  policy  of  fair  dealing,  joined  with  an 
impartial  and  exact  test  of  the  relative  merits  of  the  various 


PURCHASING  55 

commodities  purchased,  has  developed  a  large  number  of  advan- 
tages, the  value  of  which  it  is  difficult  to  measure  in  dollars  and 
cents.  While  keenness  of  judgment  of  both  materials  and  men 
still  plays  its  important  part,  the  old  idea  of  bargaining  and 
dickering  for  an  advantage  has  now  no  place  in  the  management 
of  this  purchasing  department. 

No  salesman  dares  supply  the  plant  with  an  inferior  article, 
because  he  knows  that  it  will  be  subject  to  a  rigid  test  which 
will  bring  out  its  defects.  On  the  other  hand,  manufacturers 
are  so  anxious  to  receive  this  purchasing  agent's  commendation 
that  they  usually  take  more  than  ordinary  care  in  the  preparation 
of  the  goods  made  for  him. 

Requisites  of  a  Purchasing  System.  An  efficient  system 
of  buying  will  have  these  three  fundamentals: 

1.  The  obtaining  of  that  which  is  needed  at  the  time  it  is 
needed,  and  the  obtaining  only  of  that  which  is  needed.  There 
should  be  neither  a  deficiency  nor  a  surplus. 

2.  The  obtaining  of  goods  at  proper  prices  and  of  proper 
quality. 

3.  The  avoiding  of  clerical  errors  and  fraud  by  a  system  of 
internal  checks,  which  will  quickly  uncover  them. 

Getting  what  is  wanted  and  only  that  which  is  wanted,  and 
at  the  proper  time,  is  one  of  the  chief  difficulties  of  business. 
The  coordination  between  the  stock  room  and  purchasing  depart- 
ment should  be  absolute.  In  the  small  house  which  does  not 
have  an  actual  division  into  departments,  there  is  frequently 
little  or  no  relation  between  the  purchases  and  the  needs,  while 
in  the  larger  concern,  with  both  stock  rooms  and  purchasing 
agents,  an  even  greater  confusion  sometimes  exists. 

A  well-known  automobile  maker  found  that  the  annual  rate 
of  turnover  was  not  nearly  as  great  as  the  nature  of  his  business 
would  lead  him  to  expect  and,  tracing  the  trouble,  it  was  dis- 
covered that  the  inventory  of  parts,  and  so  forth,  was  very  high. 
For  instance,  this  company  bought  finished  axle  housings  at  an 
average  price  of  $31.50.  They  used,  according  to  the  season, 
from  100  to  150  of  them  a  month.  Deliveries  were  usually  made 
without  delay,  and  they  had  no  reason  to  maintain  a  stock  beyond 
immediate  needs.  But  the  stock  averaged  about  $3,000  more 
than  was  really  needed,  and  the  same  condition  ran  through 
nearly  all  of  the  items. 


56  BUSINESS  ACCOUNTANCY 

The  stock  inventory  was  hundreds  of  thousands  of  dollars 
over  and  above  any  legitimate  requirements.  This  money  in 
stock  was,  for  the  time  being,  dead  money,  and  materially 
retarded  the  speed  of  the  turnover  and  the  rate  of  profit. 

Stock  should  be  regulated  by  setting  for  each  item  a  certain 
level  of  maximum  and  minimum.  If,  for  instance,  a  business  is 
active  in  April  and  dull  in  August,  a  maximum  stock  should  be 
carried  in  April  and  a  minimum  in  August.  The  maxima  and 
minima  should  be  determined  by  the  record  of  previous  years, 
in  combination  with  the  planning  for  the  current  year. 

Setting  Stock  Maxima  and  Minima.  The  fixing  of  the 
maximum  and  the  minimum  stocks  to  be  carried  is  based  on  the 
expectation  of  future  events  as  related  to  the  records  of  the  past; 
naturally  it  cannot  be  more  than  an  estimate,  and  all  possible 
conditions  cannot  be  foreseen,  but  reasonable  foresight  will  give 
a  very  high  insurance  against  error. 

The  fundamental  for  any  estimate  of  demand  is  a  careful 
analysis  of  past  periods.  Every  item  should  be  enumerated 
under  its  classification  in  totals  brought  down  at  least  to  quarters. 

The  tabulations  must  be  closely  studied  so  that  the  nature 
of  the  demand  may  be  known.  When  the  sales  are  uniform  it  is 
not  at  all  difficult  to  definitely  determine  on  a  program  of 
manufacture,  for  then  the  minimum  reserve  can  be  set  as  a 
definite  proportion  to  the  sales. 

This  minimum,  expressed  usually  in  terms  of  so  many  days' 
supply,  as  30,  45,  or  60,  serves  as  point  for  replacement  orders 
as  shipments  are  made,  and  sets  the  limits  which  govern  the 
frequency  of  turnover.  And  usually  production  can  be  thus 
reduced  to  a  smoothly  running  and  constant  process. 

But,  if  the  business  has  a  seasonal  color,  it  becomes  difficult 
to  operate  on  a  minimum  basis  in  almost  directly  increasing 
proportion  to  the  extent  of  the  seasonal  range  or  fluctuation. 

A  particularly  difficult  situation  was  presented  by  the  manu- 
facturer of  a  staple  article  which  had  some  1,500  items;  the 
main  items  were  seasonal,  but  others  were  not  only  seasonal, 
but  apparently  also  of  shifting  seasons.  The  entire  demand  for 
the  year,  taking  all  divisions,  moved  thus: 

First  quarter 20,000  pounds 

Second  quarter 8,000  pounds 

Third  quarter 10,000  pounds 

Fourth  quarter 30,000  pounds 


PURCHASING  57 

Had  the  production  followed  the  trail  of  this  demand,  the 
plant  would  have  run  in  cycles  of  hectic  rush  and  despairing 
idleness.    The  following  course  of  action  was  followed: 

Shipments  were  tabulated  for  five  years,  by  item  and  by 
months.  Every  article  was  studied  individually  as  a  manu- 
facture of  its  own  and,,  wherever  the  demand  for  an  article  was 
sufficiently  uniform,  a  minimum  reserve  was  used.  But  in  the 
cases  where  the  article  was  distinctly  seasonal,  a  deliberate  pro- 
gram or  predetermined  schedule  of  manufacture  was  established, 
with  the  point  of  equalizing  production  and  at  the  same  time 
assuring  an  adequate  stock  to  meet  shipping  requirements. 

Here  is  the  treatment  of  a  single  item: 

Quarters 

Article First        Second       Third      Fourth 

(lbs.)         (lbs.)          (lbs.)         (lbs.) 

Past  sales 250  300  175  675 

Monthly  schedule  of  manufacture 375  375  375  300 

Balance  after  expected  shipments 125  75  200  25 

Accumulated  reserve 125  200  400  25 

Every  item  was  analyzed  in  this  manner  and  a  program  out- 
lined, with  the  results  shown  as  follows: 

Quarters 

First          Second         Third  Fourth        Total 

(lbs.)           (lbs.)           (lbs.)  (lbs.) 

Sales 20,000           8,000         10,000  30,000         68,000 

Production 18,000         15,000         15,000  20,000         68,000 

Described  in  detail  this  meant  a  reduction  from  a  sales  range 
of  8,000  to  30,000  pounds  to  a  production  range  of  15,000  to 
20,000  pounds. 

Naturally  certain  articles  were  under-  or  overestimated  and 
caused  little  embarrassments  and  minor  upsets,  but  the  resulting 
good  as  a  whole  was  beyond  measure.  To  forestall  the  only 
possible  objection,  it  must  be  admitted  that  the  average  amount 
of  stock  was  increased  and  hence  the  average  rate  of  turnover 
decreased,  but  the  interest  in  this  increased  investment  was 
offset  overwhelmingly  by  the  increased  operating  economy  of 
more  uniform  production. 

Controlling  the  Stock  Room.  It  can  be  assumed  that  the 
business  man  has  at  least  an  approximate  knowledge  of  his 
requirements  at  the  various  seasons,  and  that  there  is  no  outside 
factor  to  justify  buying  except  for  actual  needs. 


58  BUSINESS  ACCOUNTANCY 

Before  it  is  possible  to  ascertain  the  amount  of  stock  in  hand 
at  any  time,  it  is  essential  that  accurate  information  be  had  as 
to  the  location  of  each  item,  and  that  the  directory  of  the  stock 
room  be  not  a  matter  which  is  carried  in  the  memory. 

In  one  very  large  concern  the  number  of  parts  carried  was 
exceedingly  high.  The  stock  was  scattered  and  the  only  man 
who  pretended  to  know  where  everything  was  located  was  the 
storekeeper,  and  even  he  did  not  know  the  entire  stock.  When 
a  careful  inventory  was  made,  it  appeared  that  the  company 
had  frequently  bought  additional  supplies  of  items  that  were 
acually  on  hand  but  could  not  be  located;  that  they  had  bought 
out  of  all  proportion  to  their  needs,  and  that  many  thousands 
of  dollars  were  tied  up  in  parts  which  had  been  extravagantly 
bought  in  the  past  for  models  which  were,  at  the  time  of  the 
taking  of  the  inventory,  no  longer  made.  Think  of  the  profit 
they  had  deliberately  abandoned! 

The  majority  of  the  stock  rooms  into  which  one  goes  are 
suffering  from  indigestion.  They  are  overloaded,  and  not  only 
do  they  carry  too  large  a  stock  of  many  items,  but  despite 
perpetual  inventory  records,  and  so  forth,  the  disposition  of  the 
items  is  often  carried  in  the  head  of  some  stock  man  or  other 
individual,  known  the  plant  over  as  "Pat"  or  "Gus." 

Stock  records,  if  not  properly  maintained,  are  a  waste  of 
time  and,  therefore,  money.  Time  and  again  I  have  seen 
finished  parts  come  into  a  finished  parts  storage  room  already 
overflowing  with  similar  parts. 

Another  Case  of  Expensive  Stockkeeping.  Another 
flagrant  case  of  carelessness  in  stocking  was  that  of  a  company 
making  transformer  boxes.  The  castings  were  all  bought  outside 
and  merely  assembled  in  the  plant.  The  store  room  was  full  of 
castings,  and  apparently  some  of  them  had  not  been  disturbed 
in  a  long  time.  An  actual  count  was  taken,  and  of  one  style  of 
box  some  500  were  found  to  be  on  hand.  A  stock  record  had 
been  kept — although  not  used  as  a  check — and  this  very  record 
showed  that  the  maximum  in  the  line  was  300.  The  fault  was 
traced  back  to  the  drafting  room. 

When  the  drafting  room  made  an  improvement  in  the  design 
of  the  part,  an  order  for  a  pattern  was  immediately  sent  to  the 
pattern  shop — so  far,  so  good.  But  when  the  pattern  was  com- 
pleted, new  castings  were  immediately  ordered,  and  no  attempt 
was  made  to  use  up  the  old  frames,  although  a  use  might  have 


PURCHASING  50 

been  found  for  them  on  work  still  in  process.  To  make  mat- 
ters worse  by  adding  to  the  general  confusion,  the  same  part 
number  was  given  to  the  new  design. 

The  result  was  inevitable.  If  an  order  came  in  requiring 
50  frames,  "Pat"  or  "Gus"  had  to  go  through  the  stock  on  hand 
to  see  if  he  could  find  50  of  the  new  design.  The  value  of  the 
500  balance  shown  on  the  stock  card  can  be  questioned. 

Of  course  a  new  part  number  should  have  been  given  when 
the  design  was  changed  and  another  record  started;  then  the 
parts  on  hand  would  have  been  tagged  as  obsolete  and  executive 
attention  attracted.  That  factory  had  a  small  fortune  tied  up 
in  obsolete  parts — many  of  them  five  or  more  years  old.  Here 
is  but  a  short  fist  (made  in  1915)  of  one  section  of  the  stock  room 
with  the  date  when  the  parts  were  last  used  and  their  cost: 


er  of  pieces 

Last  year  used 

Total  cost 

152 

1908 

$266.20 

461 

1908 

675.00 

61 

1908 

25.80 

50 

1911 

63.50 

60 

1912 

107.20 

51 

1909 

64.60 

146 

1907 

204.00 

58 

1907 

122.50 

Quite  often  no  stock  record  whatsoever  is  kept;  the  purchases 
are  stored  away  as  they  come  in — and  forgotten.  In  one  shop  I 
found  a  recent  purchase  of  brass  trimmings  that  the  shop  super- 
intendent had  ordered  when  he  could  not  find  the  trim  that  he 
sought.  They  had  been  bought  at  high  prices  and  constituted 
nearly  a  year's  supply,  yet  two  barrels  of  the  same  trimmings, 
bought  at  low  prices,  were  lurking  in  an  obscure  corner. 

In  the  same  factory,  chaos  also  reigned  in  the  die  and  small 
tool  storage;  obsolete  dies  crowded  out  current  dies,  and  when 
the  current  ones  could  not  be  found,  others  were  bought — and 
the  presses  waited  until  they  were  delivered.  And  all  because 
the  stock  rooms  were  not  charted  and  their  contents  kept  in 
ready  order.     Every  stock  room  should  have  its  stock  cards. 

Serviceable  Stock  Records.  A  model  stock  card  is  shown 
in  Form  12.  The  size  of  this  card  may  be  4  by  7  or  53^  by  33^, 
or  any  other  size  sufficiently  large  to  hold  all  of  the  information, 
and  yet  not  so  large  as  to  be  bulky.  The  determining  factor  in 
the  size  of  the  card  is  personal  preference,  or  sometimes  the 
possession  of  filing  cabinets  of  the  size.    This  card  is  kept  by  the 


Description. 


Article     33t-APE5 


Mark  or 
Size 


Jan. 

Feb. 

Mar. 

Apr. 

May 

June 

July 

Aug. 

Sept. 

Oct 

Nov. 

Dec. 

i 

f5o 

V^o 

100 

X 

5 

15-0 

/00 

SO 

Section. 


Bin  or  Shelf. 


he 


Ordered 


Date     Quantity 


Received 


Date    Quantity 


Delivered 


Date    Quantity     Date 


Article 


Description. 


Size. 


Maximum. 
Minimum. 


Section. 


Bin  or  Shelf. 


Ordered 


Delivered 


Balance 


Date     Quantity 


Date    Quantity     Date    Quantity    Date    Quantity 


Date    Quantity 


Received 


Date    Quantity 


FORMS  1 2  and  1 3 :  These  two  form  s 
show  model  stock  cards.  They  may 
be  most  any  size  that  your  needs  re- 
quire, the  determining  factor  in  size 
being  largely  personal  preference  or 
the  possession  of  filing  cabinets  of  a 
certain  size.  The  cards  are  usually 
kept  by  the  storeskeeper.  It  will  be 
noted  in  these  forms  that  there  is  no 
mention  of  values,  which  may  well 
be  considered  beyond  the  limits  of 
the  storeskeepers*  duties.  Form  13 
is  designed  especially  for  a  business 
where  the  stock  is  presumed  to  re- 
main at  a  fixed  level.  More  space  is 
given  to  deliveries  than  to  receipts 
on  the  supposition  that  they  will  be 
more   numerous   in   such  a  concern. 


60 


PURCHASING  61 

storeskeeper,  and  it  has  the  advantage  not  only  of  exactly- 
recording  the  location  of  the  stock,  the  receipt  and  delivery 
^ut,  and  also  the  balance,  but  at  the  top  it  contains  the  maximum 
and  minimum  amounts  which  should  be  on  hand  during  each 
month  of  the  year. 

It  will  be  noticed  that  on  this  record  there  is  no  mention  of 
value.  It  is  not  the  business  of  the  storeskeeper  to  know  or  to 
approximate  values.  His  sole  duty  is  to  keep  track  of  quantity. 
On  the  reverse  side  of  the  card  tab  is  printed  the  "out."  The 
cards  should  be  reviewed  weekly  or  monthly,  according  to  the 
size  of  the  business,  and  it  can  be  instantly  determined  whether 
or  not  there  is  a  shortage  in  any  article.  In  the  case  of  a  shortage, 
the  card  is  merely  reversed;  then  the  word  "out"  appears  in 
unescapable  fashion.  This  form  of  stock  card  can  be  adapted 
to  any  business,  will  save  hunting  for  an  article,  and  prevents 
production  hold-ups  by  giving  warning  of  impending  famine. 

Checking  Up  on  the  Storeskeeper.  In  order  to  check  up 
the  accuracy  of  the  storeskeeper,  counts  can  be  made  from  time 
to  time.  The  most  frequent  and  the  most  convenient  method  of 
checking  up,  and  one  that  is  used  by  many  concerns,  is,  when  a 
shortage  is  reported,  to  compare  at  once  the  actual  stock  on 
hand  with  the  amount  recorded  on  the  card. 

This  gives  a  continuous  check  on  errors  without  disrupting 
the  whole  business  of  the  company  to  take  inventory. 

Moreover,  it  provides  the  management  with  an  actual  count 
of  stock  when  that  count  is  the  easiest  to  obtain — that  is,  when 
at  the  lowest  ebb.  The  checking  can  be  done  with  precision, 
and  the  needless  purchasing,  that  might  come  about  through 
clerical  error,  avoided.    The  inventory  is  constant  and  perpetual. 

If  the  business  has  no  seasonal  phases  and  the  stock  is  pre- 
sumed to  remain  at  a  fixed  level,  Form  13,  may  be  used  to 
advantage.  This  card  is  larger  than  that  shown  in  Form  12,  and 
does  not  have  the  maximum  and  minimum  rulings.  More  space 
is  given  to  deliveries  than  to  receipts  on  the  supposition  that 
the  deliveries  from  a  stock  of  this  nature  will  be  more  numerous 
than  the  receipts. 

Form  14  is  for  the  house  which  has  a  unit  of  measurement 
such  as  a  roll  or  a  bale — or  any  unit  which  is  other  than  feet  or 
pounds.    It  is  popular  among  carpet,  rug,  and  linoleum  concerns. 

Form  15  is  planned  as  a  check  on  shipments  that  leave  the 
premises.     It  traces  the  fulfilment  of  orders  as  distinguished 


Artlr.la                                                                                                  Maximum 

Minimum 

Location                                                                                              Unit  nf  Mfiasurfimpnf 

On  Order 

Received 

Issued 

Balance  on  Hand 

Date 

Quantity 

Dat 

e  From 

No.  Pkgs. 

Total 
Quantity 

Quantity 
Per  Pkgs. 

Date 

Nn  PUn.  Quantity 
No.  Pkos.  per  pkg 

Total 

Quantity 

Date 

No.  Pkge. 

Quantity 

Description 

Unit 

Maximum 

Minimum 

On  Order 

Received 

Delivered 

Delivered 

Balance 

Date 

Quantity 

Date 

Quantity 

Date 

Quantity 

Order  No. 

Date- 

Quantity 

Order  No. 

Date 

Quantity 

— 

— 

At 

ticie                                                              Location                              maximum 

Unit                                      Minimum 

Ordered 

Received 

Issued 

Balance 

— 

Date 

Quantity 

Date 

Quantity 

Price 

Date 

Quantity 

Price 

Date 

Quantity 

Price 

Date 

Quantity 

FORMS   14-15-16:     These  three   forms   are   used 
effectively  in  keeping  a  running  inventory  of  raw 
materials  and  supplies.     The  upper  one  (Form  14) 
is  for  the  concern  that  has  a  unit  of  measurement 
such  as  a  roll  or  a  bale,  or  any  unit  other  than  feet 
or  pounds.     The  center  card  (Form  15)  is  planned 
as  a  check  on  shipments  that  leave  the  premises. 
It  traces  the  completion  of  orders  as  distinguished 
from  the  upper  card  which  is  designed  for  interde- 
partmental use,  although  it  need  not  be  so  limited 
It  is  particularly  adapted  for  concerns  where  requi- 
sitions mean  shipping  out  goods.     The  lower  card 
(Form  16)  is  generally  used  for  keeping  an  accurate 
and  continuous  check  on  raw  material  and  supplies. 



62 


PURCHASING  68 

from  the  preceding  cards  which  are  designed  for  interdepart- 
mental affairs — although  they  need  not  be  so  limited.  This 
card  has  the  special  heading  "order  number"  under  the  general 
caption  of  delivery;  the  number  of  the  requisition  is  entered  in 
the  space  whenever  goods  are  ordered  out.  The  form  is  partic- 
ularly adapted  for  the  trading  organization  in  which  requisitions 
mean  shipping  out  goods. 

Form  16  is  generally  used  for  the  keeping  of  raw  materials 
and  supplies.  The  comments  on  the  previous  forms  will  cover 
everything  expressed  on  this  card. 

What  Shortage  Report  Should  Show.  In  the  first  form 
of  stock  card,  showing  the  maximum  and  minimum  stocks  the 
storeskeeper  has  no  discretion  in  the  reporting  of  a  shortage. 
The  higher  executives,  through  their  planning,  have  determined 
just  how  much  of  any  one  article  should  be  on  hand  in  each 
season  of  the  year,  and,  therefore,  the  stock  is  closely  coordinated 
with  the  needs  of  the  business. 

Too  short  a  stock  in  one  single  item  may  tie  up  the  entire 
establishment,  while  too  great  a  stock,  as  has  been  pointed  out, 
may  materially  cut  into  the  profits.  Therefore,  the  withdrawal 
of  discretion  in  the  matter  of  quantities  from  the  storeskeeper 
is  part  of  the  best-managed  business. 

In  many  cases,  it  may  almost  be  said  in  the  usual  case,  the 
reporting  of  a  shortage  rests  largely  with  the  storeskeeper  him- 
self. He  decides,  by  rule  of  thumb,  when  this  or  that  article  is 
low  and  he  reports  accordingly,  the  deficiencies  being  ascertained 
from  the  weekly  or  monthly  inspection  of  the  stock  records. 
The  storeskeeper  makes  out  the  report  and  forwards  it  to  the 
purchasing  department.  In  the  case  of  the  small  business  which 
does  not  maintain  separate  departments,  the  report  acts  as  a 
memorandum  of  what  the  owner  should  immediately  buy. 

A  model  form  of  shortage  report  is  Form  17,  on  which  is 
recorded  all  the  articles  the  stock  of  which  is  too  low  according 
to  the  stock  cards.  This  form  follows  out  the  stock  card,  Form 
12,  on  which  was  entered  the  maximum  and  minimum  amounts. 

Upon  the  receipt  of  a  shortage  report  by  the  purchasing 
department,  or  if  such  a  department  does  not  exist,  by  the  owner, 
the  figures  of  the  balance  on  hand  as  shown  by  the  card  should 
at  once  be  checked  by  a  physical  count. 

The  shortage  report,  properly  used,  advises  the  purchasing 
department  in  ample  time  of  the  need  for  supplies  or  materials, 


WEEKLY  SHORTAGE  REPORT 

MAKE  PHYftCAL  COUNT  OF  ITEMS                                                                                                 TH^^^L     lc/l<? 
BEFORE  ENTERING  ON  THIS  REPORT                                                                                         DATE    \\  [UL,TCt\.    /.?//» 

DESCRIPTKDN 

MAXIMUN 

TO  BE 
CARRIED 

1    MINIMUM 
TO  BE 
CARRIED 

LAST 
ORDER 
NUMBER 

NOW 

ON 

HAND 

SAFEtY  POSTS 

iSoo 

SQO 

AY  7* 

+4L 

BLbDES 

Q.SOO 

10  00 

13+0 

119-0 

QUOTATIONS 

ARTICLE                                                                                                            MAXIMUM 

MINIMUM 
DESIRABLE 

DRDFR 

DATE 

FIRM 
NO. 

FIRM  QUOTING 

ON 
QUANTITY 

PRICE      I 

DISCOUNT 

FREIGHT 

NET  COST 
PER  UNIT 

REMARKS 

, 

PURCHASES1 

DATE 

FIRM 
NO. 

QUANTITY 

PRICE 

REMARKS 

DATE 

FIRM 
NO. 

QUANTITY 

PRICE 

REMARKS 

FORMS  17-18-19:     Form  17  may  be  considered 
an   ideal  shortage  report  form.     It  follows  out 
the  stock  card  shown  in  Form  12,  which  pro- 
vides   for    maximum  and  minimum  amounts. 
Forms   18  and   19  provide  for   quotation  and 
purchase  records  for  the  purchasing  department. 

64 


— 

Oati 


INSERT  I 

FORM  20,  described  on  page  65 


- 


V^ .- 

RECORD  OF  STOCK  REQUIREMENTS 

s  \  ^^A\ 

Size 

WT.  PER  1 

)                           LBS.               LIMITS.                MAXIMUM                                           MINIMUM 

REQUIREMENTS 

CUSTOMER'S  DELIVERY  EXPECTATIONS 

ORDER 

Amount 
Due  on 
Purchase 
Orders 

.       BALANCES 

(to  be  entered  weekly) 

Date 

Order 
and 
Spec. 

Customer 

Req'n 
No. 

Quantity 

Est'd. 

Wt. 

per  Unit 

Total 
Required 

Jan. 

Feb. 

Mar. 

Apr. 

May 

June 

July 

Aug. 

Sept. 

Oct. 

Nov. 

Dec. 

Date 

Req'n 
No. 

Purchase 
Order 

Quantity 

Price 

Date 

Available 

On  Hand 

^ttvv^ 

^^\  no**** 

^        \-^V     o,4e' "  ^^K^^- 

^Jk-~^^ 

FORM  20:     It  is  often  advantageous  for  a  buyer  to  contract 
for  supplies  a  whole  year  in  advance  to  be  delivered  in  monthly 
shipments.     This  situation  is  provided  for  by  this  form,  which 
utilizes  12  columns,  each  representing  a  month.     When  the  bid 
is  accepted,  the  buyer  notes  in  the  proper  column  the  amounts 
and  the  promised  delivery  dates.     A  slip  sheet  is  inserted  to 
record  the  receipts  on  the  order.     This  serves  as  a  check  and,  if 
the  contract  has  been  only  for  delivery  at  the  market,  also  as  a 
record  of  the  prices  charged.    A  concern  buying  products  on  which 
immediate  delivery  cannot  be  had  will  find  this  form  useful. 

- — 

J^^ 

. 

S" 

o 


PURCHASING  65 

and  it  avoids  the  "rush"  orders,  the  possible  stopping  of  manu- 
facture and  the  certain  disadvantage  of  being  forced  to  buy  at 
top  prices  in  order  to  secure  immediate  delivery,  and  it  also 
absolutely  prevents  the  answer  of  "all  out"  being  given  when 
any  particular  article  is  requisitioned. 

Purchasing  Department  Quotation  Lists.  The  shortage 
report  having  reached  the  purchasing  agent,  he  decides,  after 
market  inquiries  have  been  made,  from  whom  and  at  what 
price  the  articles  needed  shall  be  bought.  The  quantity  which 
he  will  purchase  is  to  be  determined  primarily  by  the  minimum 
and  maximum  record,  but  it  also  may  be  influenced  by  market 
conditions,  in  that  he  will  buy  more  in  a  rising  market  than  in 
a  falling  market. 

The  properly  organized  purchasing  office  is  equipped  with 
all  possible  data  on  past  purchases,  the  performance  of  material 
purchased,  prices,  and  the  firms  with  whom  experience  has 
found  it  advisable  to  deal.  The  essential  records  of  the  pur- 
chasing department  are  the  quotation  and  purchase  cards, 
which  in  the  best  form  are  combined  in  one  card,  the  front  and 
back  of  which  are  reproduced  in  Forms  18  and  19. 

On  the  face  of  the  card  is  listed  the  article,  the  maximum  and 
minimum  amount,  and  the  desirable  order.  The  desirable  order 
is  determined  by  past  experience  and  is  the  size  of  order  which 
can  be  most  economically  filled  by  the  source  of  supply.  Each 
firm  from  which  the  company  buys  has  a  number  and  for  con- 
venience the  number  instead  of  the  name  is  used  in  subsequent 
records.  On  the  quotation  card  are  the  complete  details  of  all 
quotations  and  a  column  is  left  for  remarks,  should  an  extra 
quantity  or  price  claim  be  made,  or  for  the  time  of  delivery. 

On  the  reverse  are  noted  the  purchases  with  the  quantity 
and  price.  Thus,  the  purchasing  agent,  on  any  article  that  may 
be  desired,  has  immediately  at  hand  a  record  of  the  past  pur- 
chases and  what  firms  have  given  the  best  satisfaction. 

Form  20  shown  on  Insert  I  keeps  track  of  purchases  for  future 
delivery.  It  may  be  advantageous  for  the  buyer  to  contract 
for  the  whole  year  with,  say,  monthly  shipments.  This  is  often 
advisable  in  bulky  commodities  which  take  up  too  much  storage 
space  or  again  it  may  be,  as  in  the  steel  trade,  that  the  seller 
cannot  promise  more  than  a  certain  amount  in  any  one  month. 

This  situation  is  provided  for  in  the  twelve  columns  each 
representing  a  month.     When  the  bid  is  accepted,  the  buyer 


66 


BUSINESS  ACCOUNTANCY 


notes  in  the  appropriate  columns  the  amounts  stipulated  and 
their  promised  delivery.  A  small  slip  sheet  is  inserted  in  the 
larger  form  to  record  the  receipts  of  the  portions  of  the  order. 
This  serves  as  a  check  and,  if  the  contract  has  been  only  for 
delivery  at  the  market,  also  as  a  record  of  the  prices  charged. 
A  concern  buying  much  steel  or  kindred  products  on  which 
immediate  delivery  cannot  be  had,  will  find  the  form  useful. 

Performance  Records.  Supplementing  the  quotation  rec- 
ord, and  equally  controlling  the  purchasing  agent,  is  the 
performance  record.  In  the  purchase  of  ordinary  supplies  many 
concerns  do  not  deem  it  worth  while  to  keep  performance  records, 
while  others  keep  a  tally  of  the  exact  performance  of  every 
article  that  comes  within  their  purchasing  activities.  In  practi- 
cally all  purchases  of  equipment,  such  as  belts,  machines, 
conveyors,  and  the  like,  or  in  fact  anything  other  than  current 
staple  supplies,  a  performance  record  should  be  maintained. 
A  form  that  has  given  satisfaction  is  Form  21.  The  performance 
record  acts  as  a  check  upon  the  quotation  card. 


PERFORMANCE  RECORD 
DETAILS  INSIDE 

AfH«:1^,        _                                                                                                                                              Article  Nn    ,    .    , 

Date 

Item 

Maker 

Price 

Remarks 

Form  21 

ll 

The  purchasing  agent  will  commonly  ask  for  quotations  when 
he  has  determined  the  amount  of  the  order  and  the  possible 
firms  from  which  to  buy.  When  he  receives  his  bids,  the  past 
performance  of  similar  articles  sold  to  him  by  that  bidder  may 


INSERT  II 

FOKM3  22-A  to  22-E,  described  on  page  67 


FORMS  22-A  to  22-E:  There 
forms.  They  of  course  must  vary  according 
turc  of  the  business,  but  the  forms  shown  on 
have  proved  very  satisfactory.  The  order  is  made  out 
in  triplicate  and  the  distinguishing  features  are  these: 
On  the  left  of  the  original,  which  goes  to  the  seller,  is 
a  perforated  slip.  This  slip  has  on  it  a  request  that 
it  be  returned  with  the  delivery  dates  entered,  which 
is  equivalent  to  delivery  promise.  These  order  forms 
are  fully  explained  on  page  67. 


PURCHASING  67 

be  as  important  to  him  as  the  price,  and  sometimes  of  greater 
importance.  The  time  of  delivery  is,  of  course,  also  a  factor, 
but  one  of  varying  importance.  The  performance  record  will 
determine  which  article  is  really  the  cheapest. 

One  concern  in  Pennsylvania — a  heavy  user  of  leather  belting 
— kept  records  of  all  belts  purchased  for  a  period  of  years.  It 
found  that  the  highest-priced  belt  which  was  sold  to  it  was 
actually,  from  the  point  of  performance,  the  best  investment, 
because  the  most  economical.  It  standardized  on  this  belting 
and  as  a  result  has  saved  about  $6,000  a  year. 

Ordering  the  Material.  The  order  and  the  source  of  supply 
having  been  decided  upon,  the  purchasing  agent  gives  the  order. 
It  is  desirable  in  small,  and  essential  in  large,  business  that  a 
regular  form  of  order  be  used.  There  are  numerous  order  forms 
but  the  set  of  forms  which  have  been  found  to  be  most  satisfactory 
in  every  way  are  reproduced  in  Forms  22-A  to  22-E  and  shown 
on  Insert  II.  The  order  is  made  in  triplicate  and  the  distin- 
guishing features  are  these:  On  the  left  of  the  original 
copy,  which  goes  to  the  man  from  whom  you  buy,  is  a  perfor- 
ated slip.  This  slip  has  on  it  a  request  that  it  be  returned 
with  the  dates  of  delivery  entered.  Thus  a  specific  promise  of 
delivery  is  exacted  from  the  seller. 

When  this  slip  comes  back  it  is  pasted  on  the  triplicate  order 
which  remains  on  file  in  the  purchasing  department.  The  last 
copy  should  be  made  upon  strong  manila  paper  or  cardboard 
that  will  stand  on  edge.  Numbers  representing  days  of  the 
month  and  letters  representing  the  months  may  be  provided 
as  the  top.  The  return  slip  from  the  seller  gives  the  dates  of 
delivery  and  these  dates  may  be  noted  by  fastening  a  tab  to  the 
corresponding  month  and  day  on  the  top  of  the  triplicate  card. 

The  Purchasing  Agent's  Follow-Up.  The  datings  have 
also  another  function — to  follow  up  the  receipt  of  the  order. 
For  instance,  if  the  order  is  mailed  on  the  third,  and  an  acknowl- 
edgment should  come  back  not  later  than  the  seventh,  then  the 
little  tab  or  rider  is  attached  to  the  top  of  the  card  on  the  seventh. 
Each  morning  the  purchasing  agent  should  glance  through  the 
cards  and  take  out  those  bearing  riders  for  that  day  or  the  previous 
day  and  follow  them  up. 

The  duplicate  copy  of  the  order  goes  to  the  receiving  clerk.  It 
is  identical  with  the  original,  except  that  the  column  in  the  original 
for   "quantity   ordered"  is  cut  out.     The  quantity  does  not 


68  BUSINESS  ACCOUNTANCY 

appear  on  the  receiving  clerk's  form,  and  he  must  check  the 
receipts  by  an  independent  count. 

The  importance  of  this  independent  count  is  great.  The  receiv- 
ing clerk,  being  human,  is  certain  some  time  to  guess  at  the  amount 
actually  received — if  he  has  before  him  the  amount  that  should 
be  received.  But  not  knowing  that  amount,  he  is  forced  in  every 
instance  to  count.  Numerous  errors,  and  not  a  few  cases  of 
fraud,  have  arisen  in  the  department  of  the  receiving  clerk. 

For  instance,  it  was  the  custom  of  a  beef-packing  house  to 
allow  from  four  to  six  pounds  for  shrinkage  per  carcass  on  steers 
shipped  to  subsidiary  houses.  The  actual  shrinkage  of  beef 
can  only  be  approximated,  for  variable  elements,  such  as  the 
physical  condition  of  the  animal  before  killing,  the  icing  in  transit, 
the  distance  from  the  stock  yards,  and  numerous  other  factors, 
all  enter  into  the  loss  of  weight. 

Corn-fed  cattle  lose  very  little  weight — possibly  four  pounds 
— while  grass-fed  steers  will  lose  five  or  even  six  pounds.  The 
receiving  clerk,  in  cahoots  with  another  worker,  found  that  by 
taking  the  maximum  allowance  in  every  case,  the  actual  shrinkage 
was  so  much  less  that  an  entire  steer  could  be  counted  out  in  the 
contents  of  each  seven  cars.  Receipts  averaged  about  nine  cars 
a  week,  so  that  the  conspirators  added  to  their  incomes,  at  the 
expense  of  the  company,  about  $100  a  week.  Had,  however, 
this  concern  been  equipped  with  a  purchasing  order  of  the 
type  illustrated,  the  receiving  clerk  would  not  have  been  able 
to  determine  how  much  weight  might  be  subtracted.  He  would 
have  been  compelled  to  return  true  weights  and  numbers,  and  the 
fraud  would  not  have  been  possible. 

A  Simplified  Purchase  Order.  Another  form  of  purchase 
order  is  Form  23,  which  is  also  executed  in  triplicate,  the  original 
going  to  the  seller,  the  duplicate,  with  the  quantities  removed, 
to  the  receiving  clerk,  and  the  third  copy,  again  on  heavy  paper 
or  cardboard,  being  retained  in  the  purchasing  department. 
This  order  is  somewhat  simpler  than  the  one  previously  given, 
but  does  not  contain  quite  as  many  desirable  features,  especially 
those  on  delivery. 

The  style  of  purchasing  order  and  record  shown  on  Insert 
II,  is  entirely  complete  and  has  been  used  with  great  success  by 
a  number  of  large  establishments.  Form  23  follows  the  same 
lines  as  the  preceding  forms,  except  that  it  is  in  quadrupli- 
cate; the  uses  of  copies  are  noted  od  the  illustration. 


1  2  3  4  5  6  7  8  9  10  11 12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  Z7  28  29  30  31  J  F  M  A  M  J  J  A  S  O  N  D 


No.  (serial) 


19_ 


Please  ship  the  following  to. 


and  charge  to  our  account 


Quantity 


Description 


Price 


Shipping 
Date 


FORM  23:  This  form  provides  for  a  triplicate 
copy  of  all  purchasing  orders.  The  original 
copy  goes  to  the  vender,  the  first  copy  to  the 
receiving  clerk,  and  the  third  is  filed.  In  order 
to  secure  accurate  and  independent  count  of 
receipts  by  the  receiving  clerk,  the  quantity  col- 
umn is  cut  off  from  the  receiving  clerk's  sheet. 


Please  observe  the  following  instructions  in  packing,  shipping  and 

billing 


Route  Via 


Terms 


Very  Truly  Yours 


(  Verbal 
Confirming  (Telegram 
(Telephone 


Order  of 


By- 


69 


70  BUSINESS  ACCOUNTANCY 

Every  purchase  should  have  its  formal  order,  and  in  the  case 
of  a  verbal,  telephone,  or  telegraph  order,  the  written  author- 
ization should  follow  immediately. 

An  order  once  given  should  be  closely  followed;  the  auto- 
matic follow-up  is  a  feature  of  the  above  forms.  The  purchaser 
who  keeps  incessantly  after  the  seller  is  apt  to  be  the  man  who 
gets  his  goods  first,  and  although  crowding  the  seller  may  at 
times  be  purely  an  academic  exercise,  yet  no  order  given  should 
be  neglected  until  the  goods  are  actually  received  or  until  some 
good  reason  for  their  non-delivery  is  at  hand.  Otherwise  the 
progress  of  important  work  will  be  held  up  through  negligence 
in  the  purchasing  department  and  an  operation,  which  otherwise 
would  show  a  profit,  turned  into  a  loss. 

Take  the  case  of  a  vault  builder.  He  had  erected  several 
sections  of  deposit  boxes,  covering  some  hundreds  of  square  feet 
of  his  factory  and  cluttering  up  badly  needed  floor  space  with 
massive  drawers,  framework,  and  so  forth.  When  all  was  in 
place,  it  was  suddenly  discovered  that  the  locks  and  the  keys  had 
not  been  received  from  the  lock  makers.  Through  several  weeks 
the  imposing  structure  of  the  deposit  boxes  took  up  most  of  the 
available  floor  space  of  that  manufacturer  and  cut  deeply  into  his 
expected  profits,  for  little  or  no  other  work  could  go  forward 
while  that  incubus  remained. 

Purchasing  Supplies.  The  purchasing  of  supplies  has  been 
touched  on  in  the  earlier  portions  of  this  chapter,  particularly  in 
the  matter  of  performance  records,  but  additional  checks  upon 
their  use  can  well  be  investigated  by  the  purchasing  department — 
although  at  times  the  subject  concerns  costs  rather  than  account- 
ing proper.  Whenever  the  cost  of  supplies  runs  into  several 
thousand  or  more  dollars  a  year,  a  close  study  of  their  use  will 
reveal  possible  economies. 

The  term  "supplies"  includes  all  items  of  an  "expense"  nature 
often  referred  to  as  "indirect  materials."  They  consist  of  those 
articles  which  neither  enter  directly  into  the  product,  nor  which 
can  be  classed,  because  of  their  short  fife,  as  a  part  of  the  per- 
manent investment.  Every  plant  has  innumerable  articles  of 
this  nature,  such  as  drills,  taps,  reamers,  files,  belts,  lubricating 
oil,  buffing  wheels,  tripoli,  brooms,  and  so  forth. 

A  plan  for  the  reduction  of  such  costs  must  be  based  on 
detailed  knowledge,  both  as  to  the  quantities  consumed  and  the 
results  produced  by  their  use.    To  secure  such  data,  there  are 


PURCHASING  71 

four  avenues  requiring  development  before  maximum  results  can 
be  obtained;  although  each  step  in  itself  should  yield  return. 

First,  the  installation  of  a  complete  requisition  system. 

Second,  the  tabulation  of  supplies  used,  by  items  and  depart- 
ments, and  summarized  monthly  in  comparative  form. 

Third,  constant  quality  tests  of  the  more  important  articles. 

Fourth,  the  establishment  of  an  incentive  to  hold  the  supply 
consumption  to  a  minimum. 

A  written  order,  signed  by  a  responsible  department  head, 
should  be  tendered  to  the  stores  department  before  anything  can 
be  withdrawn.  These  requisitions  should  be  priced,  then  separ- 
ated by  departments  and  finally  classified,  summarizing  the  cost 
of  each  of  the  important  articles  within  each  department.  By 
tabulating  these  results  in  comparative  form  monthly,  or  "plot- 
ting a  curve,"  an  accurate  index  of  the  fluctuating  cost  of  the 
"expense"  items  can  be  obtained,  which  should  serve  as  the  basis 
of  inquiry. 

Any  item,  the  monthly  cost  of  which  exceeds  a  predetermined 
normal  amount,  should  be  investigated  and  tests  made  to  ascertain 
the  efficiency  of  the  article  used.  I  recently  made  some  tests  of 
reamers  and  found  that  only  40%  of  them  were  adapted  to  the 
work.  When  the  proper  grades  of  steel  were  procured,  there 
occurred  an  immediate  monthly  saving  of  $200. 

In  my  experience,  it  has  been  very  rare  indeed  where,  after 
a  thorough  study,  reductions  of  at  least  10%  of  the  former  cost 
of  supplies  have  not  been  made.  In  many  instances  considerably 
higher  percentages  of  saving  have  been  secured. 

Receiving  the  Goods.  When  the  goods  come  in,  the 
receiving  clerk  records  on  his  duplicate  order  blank  the  actual 
amounts  which  reach  his  hands.  He  forwards  his  tally  to  the 
purchasing  department,  where  the  amounts  received  are  com- 
pared with  the  amounts  ordered  and  any  differences  noted.  The 
purchasing  agent  then  attaches  the  duplicate  to  the  invoice  and 
turns  it  in  to  the  accounting  department. 

We  have  now  reached  the  point  where  the  purchasing  records, 
with  their  associated  reports,  join  with  the  accounting. 

The  Charge  Register.  The  entry  of  the  invoice  will  be 
made,  in  any  even  moderately  up-to-date  business,  in  a  charge 
register.     The  charge  register  (formerly,  in  less  improved  form, 


72  BUSINESS  ACCOUNTANCY 

termed  a  "voucher  register")  is  the  result  of  a  careful  study  to 
eliminate  unnecessary  work  in  bookkeeping.  It  is  the  modern 
innovation  and  is  now  the  largest  of  the  fundamental  books. 

Some  form  of  charge  register  can  be  used  to  advantage  by  any 
business.  It  has  nearly  driven  out  the  old  purchase  journal  and 
has  vastly  changed  the  manner  of  use  of  the  ledger.  The  present- 
day  thought  is  to  achieve  as  many  results  as  possible  with  the 
one  act;  that  is  the  thought  back  of  the  charge  register. 

The  exact  form  of  the  register  will  depend  upon  the  nature 
and  the  extent  of  the  business  which  is  to  use  it,  but  all  charge 
registers  are  formed  on  the  same  principle.  A  representative 
type  is  Form  24. 

To  the  left  is  entered  the  name  of  the  seller,  the  date  and  the 
total  amount  of  his  invoice,  then  comes  a  space  for  the  date  when 
the  invoice  is  paid  and  finally  the  columns  for  the  divisions  of 
the  business  to  which  the  invoices  may  properly  be  chargeable. 

In  the  older  accounting  practice  every  purchase  brought  about 
a  ledger  entry  to  the  debit  of  the  thing  bought  and  a  credit  to 
that  person  from  whom  the  thing  was  bought;  the  original  entry 
being  made  in  the  journal,  every  item  required  one  entry  and  two 
postings.  Suppose  a  concern  had  300  purchases  a  month;  each 
purchase  would  have  its  initial  entry  in  the  journal  and  two 
postings,  or  900  bookkeeping  operations. 

How  the  Charge  Register  Simplifies  Accounting.  The 
opportunity  for  error  was  enormous  and,  though  the  errors 
would  be  discovered,  the  vast  time  already  consumed  in  the 
entering  and  posting  would  be  enlarged  by  the  hours  spent  in 
running  down  clerical  errors.  The  whole  proceeding  was  wasteful 
of  human  effort,  and  has  no  place  in  modern  business.  The 
safeguards  which  it  undoubtedly  gave  can  be  obtained  more 
economically.  The  charge  register  gives  both  the  safeguards  and 
the  economy  of  effort. 

Again,  in  the  older  accounting  practice,  new  accounts  were 
posted  to  the  individual  accounts  contained  in  the  general  sub- 
sidiary "accounts  payable  ledger"  and,  as  the  bills  were  paid, 
the  corresponding  credits  were  posted  to  the  detailed  accounts. 
In  the  charge  register,  the  "date  paid "  column  takes  the  place 
of  the  ledger  account. 

As  the  bills  are  entered  and  posted  in  the  "accounts  payable" 
column  they  show  the  liability  of  the  company  in  detail.  At  the 
end  of  the  month  the  total  of  these  items  is  posted  to  a  controlling 


PURCHASING  73 

account  in  the  general  ledger.  In  the  succeeding  months,  as 
bills  are  paid,  instead  of  posting  to  the  individual  accounts  as 
was  formerly  done,  the  date  is  merely  stamped  in  the  "date 
paid"  column  alongside  the  invoices  noted  on  the  charge  register. 
Thus  a  double  posting  waste  is  avoided. 

Form  25  varies  from  the  preceding  form  by  the  addition  of 
another  column  headed  "debit  accounts  payable."  Should  a 
payment  be  made  in  part,  instead  of  in  full,  for  an  invoice,  it  is 
entered  in  this  column,  as  are  also  contra-adjustments,  such  as 
returns.  By  deducting  the  debits  from  the  credits  the  net 
balance  is  had. 

Form  26  differs  in  having  a  "general  ledger"  column.  In 
the  course  of  business  arise  many  transactions  which  would 
commonly  have  to  go  through  the  journal.  Suppose  materials 
be  bought  from  someone  to  whom  you  already  sell:  Accounts 
receivable  instead  of  accounts  payable  should  be  credited  so 
that  your  purchase  can  be  offset  against  the  amount  due  you. 

If  a  concern  has  more  than  one  plant,  the  insertion  of  addi- 
tional sheets  will  cover  all  of  the  information  contained  on 
Form  27.  Where  two  or  more  plants  are  being  operated,  and 
it  is  important  to  know  the  operating  costs  of  each  plant,  the 
"insert"  sheet  is  provided  to  handle  the  individual  items  as 
expressed  on  the  former  forms. 

The  Divisions  of  the  Charge  Register.  The  elements  of 
business  are: 

(1)  Materials  and  supplies;  (2)  labor,  productive  and  non- 
productive; (3)  overhead,  or  expense;  (4)  selling  overhead  or 
expense. 

The  ordinary  charge  register  is  ruled  to  take  these  divisions 
of  business  activity  with  or  without  subdivision  and  according 
to  the  nature  of  the  work  in  hand.  The  subdivisions  and  the 
resulting  columns  are  limited  only  by  the  size  of  the  page.  I 
do  not  recommend  the  inclusion  of  columns  to  a  number  which 
will  make  a  page  more  than  24  inches  wide;  this  width,  with  a 
depth  of  50  quarter-inch  lines,  makes  a  workable  book.  The 
Interstate  Commerce  Commission  in  its  first  essay  with  the 
accounts  of  railroads  prescribed  a  distribution  requiring  about 
130  columns;  this  was  so  wide  that  the  clerks  could  nicely  have 
used  jitneys  to  make  the  excursions  from  one  end  to  the  other. 
Some  of  them  even  asserted  that  the  register  was  health  stealing 


CHARGE  REGISTER 

o 

Entry 
No. 

Month  i 

MAn.'j           Creditor 

191_ 

7?o 

Date 
Paid 

Debit  Materials 

Debit 
Supplies 

POSTS 

METAL 

00 

I  3   ''  /-k^/iy-  (LmffA   \ 

S/2'jtf 

2.IQS~0 

ot 

S     K^Aftfn^A   1 

oso-oo 

ItSTidO 

02 

1  7       tfWv  fa*/M/i       IdO'^ 

IDS 

%f 

03 

'  to  ■  ix^^p,w 

(S 

SO 

04 

// 

05 

1'                      !• 

06 

07 

08 

09     k 

1 

10 

|i 

11 

i      II 

1 

12     ;                                                         1 

13 

FORM   24:     This  form,  of  which  the  portion 
directly  opposite  is  a  part,  serves  as  a  purchase 
ledger  and  also  as  a  journal,  thus  eliminating 
extra  clerical  effort.     It  also  provides  a  single 
medium    for   showing    at   a   glance    the    exact 
amount    and    purpose    of    each    disbursement. 

» 

40 

o 

41 

42     || 

43 

44 

45 

■ 

1 

46 

I 

47 

II 

1 

48 

i: 

49 

I      .                      P 

CHARGE  REGISTER 

o 

Entry  I'Monttw                         Qf 

N<k  I1  mil! 

Credit 

Acccjnts 
Payable 

Debit 

Accounts 
Payable 

Date 

Debit  Materials 

Debit 
Supplies 

Paid 

oo  t        I 

01 

02 

03 

04                    J 

05    '          r 

06    ' 

07 

09 

09 

10 

. 

11 

" 

13 

a 

. 

39 

o 

43 

41       ■ 

4: 

1 

1 

43 

44 

45 

46 

47 

48 

' 

f 

49 

1 

74 


o 

CHARGE  REGISTER 

Productive 
Labor 

Non- 
Productive 
Labor 

Factory  Expense 

Selling  Expense 

Sundries 

Entry 

No. 

Amount 

Description 

Amount 

Description 

Account 

Folio 

Debit 

Credit 

00 

01 

02 

IS 

ro 

H-.L  +  -P. 

03 

04 

05 

06 

07 

08 

09 

10 

11 

12 

13 

14 

15  . 

o 

40 

41 

42 

43 

44 

45 

46 

47 

48 

49 

o 

CHARGE  REGISTER 

Productive 
Labor 

Non- 
Productive 
Labor 

Factory  Expense 

Selling  Expense 

Sundries 

Entry 
No. 

Amount 

Description 

Amount 

Description 

Account 

Folio 

Debit 

Credit 

00 

01 

02 

03 

04 

05 

06 

07 

08 

09 

10 

11 

12 

FORM  25:     This  form,  of  which  the  portion 
directly  opposite  is  a  part,  differs  from  Form  24 
in   that   a   special   "debit   accounts    payable" 
column  has  been  added.     Should  a  payment  be 
made  in  part  instead  of  in  full,  as  is  very  often 
the  case,  the  amount  is  entered  in  this  column. 

13 

14 

J5-J 

. 

T               1 

o 

40 

41 

42 

43 

44 

46 

47 

48 

48 

75 


CHARGE  REGISTER 

o 

Entry 
No. 

Month 
191 

Creditor 

Credit 
Accounts 
Payable 

Credit 
General 
Ledger 

Date 
Paid 

Debit  Materials 

Debit 

Supplies 

Merchandise 

Brought  Forward 

00 

01 

02 

03 

04 

OS 

06 

07 

08 

09 

10 

11 

FORM    26:     This    form,    which    includes    the 
portion  directly  opposite,  contains  a  '  'general 
ledger"    column.     Transactions    which    would 
commonly  have  to  go  through  the  journal,  as 
when  materials  are  bought  from  a  concern  you 
are  selling,   are   provided   for   by  this  column. 

12 

13 

14 

IS 

16 

-  «■" 

o 

44 

45 

46 

47 

48 

49 

1 

CHARGE  REGISTER 

o 

Entry 
No. 

Month 
191 

Creditor 

Credit 
Accounts 
Payable 

Date 
Paic" 

Debit  Materials 

Debit 
Supplies 

ductive 
Labor 

Non- 

Productive 

Labor 

Administrative  Expense 

Amount 

Description 

Brought  Forward 

00 

01 

02 

03 

04 

05 

06 

07 

• 

08 

09 

10 

11 

12 

13 

14 

IS 

L_16_ 

" 

o 

44 

45 

46 

47 

48 

49 

76 


o 

CHARGE  REGISTER 

Productive 
Labor 

Non- 
productive 
Labor 

Factory  Expense 

Selling  Expense 

Sundries 

Entry 

No. 

Amount 

Description 

Amount 

Description 

Account 

Folio 

Oeblt 

Credit 

00 

01 

02 

03 

04 

OS 

OS 

07 

08 

09 

10 

11 

12 

13 

14 

IS 

-M— 

o 

- 

43- " 

44 

45 

46 

47 

. 

48 

43 

o 

CHARGE  REGISTER 

Jones  St.  Factory  Expense 

Anderson  Ave.  Factory  Expense 

Selling  Expense 

Sundries 

Entry' 
No. 

Amount 

Description 

Amount 

Description 

Amount 

Description 

Account 

Folio 

Debit 

Credit 

00 

01 

02 

03 

04 

OS 

OS 

07 

08 

09 

10 

FORM  27:     If  a  concern  has  more  than  one 
plant,   the   insertion   of  additional   sheets   will 
cover   all   the   information   contained   on   this 
form    which    includes     the    opposite    portion. 
Where  several  plants  are  operated,  the  "insert" 
sheet  is  divided  to  handle  the  individual  items. 

11 

12 

13 

14 

15 

16 

< 



o 

44 

45 

46 

47 

48 

* 

49 

77 


78  BUSINESS  ACCOUNTANCY 

in  that  the  climatic  conditions  at  the  one  end  of  the  page  were 
apt  to  be  very  different  from  those  at  the  far  end! 

Practically,  charge  registers  have  developed  into  two  classes: 

1.  The  small  business  which  does  not  manufacture,  or 
manufactures  only  one  article,  can  afford  to  make  the  charge 
register  inclusive  and  to  provide  columns  for  each  division  of 
expense  that  has  a  fairly  frequent  number  of  transactions.  The 
occasional  entries  can  be  put  into  the  hold-all  of  a  "sundries" 
column  and  dissected  in  the  ledger.  Rent,  insurance,  taxes, 
and  purchases  of  fixed  assets  go  through  as  sundries.  It  is  not 
worth  while  to  provide  space  for  any  division  which  has  but 
one  or  two  charges  a  month,  although  I  have  seen  registers 
elaborated  so  that  they  provide  for  every  conceivable  item. 

2.  The  large  or  the  complex  business  cannot  possibly  provide 
a  charge  register  with  enough  columns  to  hold  all  detail,  and 
therefore  the  charge  register  becomes  a  controlling  account  with 
broad  divisions,  each  of  which  are  a  subcolumn  headed  "descrip- 
tion." The  invoices  are  entered  under  the  proper  classification 
and  the  details  are  then  carried  in  subsidiary  accounts.  Five 
hundred  columns  on  a  charge  register  would  not  contain  all  the 
needed  detail  of  large  business,  and  hence  it  is  not  common 
sense  even  to  try  to  make  the  register  more  than  a  broad  classi- 
fication of  items. 

Control  of  the  Charge  Register.  Some  of  the  older  book- 
keepers object  to  the  charge  register  on  the  ground  that  it  does 
not  give  proper  controlling  accounts.  The  principle  that  every 
debit  must  have  a  credit  is  fundamental  and  without  it  no  assur- 
ance can  be  had  against  errors.  But  this  principle  is  fully  preserved 
in  the  charge  register  system — the  total  of  the  credit  column  of 
the  register  must  agree  with  the  aggregate  of  the  debit  distribu- 
tion columns  on  the  sheet.  Here  is  one  check.  The  totals  alone 
are  then  posted  to  the  general  ledger  accounts  instead  of  the 
voluminous  individual  entries.  The  unpaid  invoices  are  filed 
according  to  the  name  of  the  creditor  in  an  "unpaid  invoice" 
file;  it  is  the  matter  of  but  a  few  moments  to  run  over  the  invoices 
to  any  one  creditor  if  it  be  desired  to  know  the  total  or  the  details 
of  what  is  owing  to  him;  the  invoices  will  give  more  and  better 
information  than  the  ledger  accounts  possibly  could. 

The  open  spaces  in  the  "account  paid"  column  should 
check  up  with  the  unpaid  invoices.     If  the  wrong  invoice  has 


PURCHASING  79 

been  marked  paid,  a  comparison  between  the  unpaid  invoices 
and  the  open  spaces  on  the  charge  register  will  quickly  locate 
the  error.  The  invoices  are  afterward  filed  in  a  paid  invoice 
index  again  under  the  creditor's  name.  The  charge  register 
gives  every  check  and  safeguard  of  the  journal  ledger  plan,  and 
in  much  more  convenient  form. 

These  matters  of  payment,  however,  more  properly  belong 
in  the  next  chapter. 

THE  SPECIALTY  COMPANY 

It  will  be  assumed  that  the  company  has  now  reached  a 
development  where  it  needs  more  efficient  bookeeping  methods 
and  a  charge  register  system  has  been  installed. 

All  of  the  transactions  of  the  company  are  not  entered 
upon  the  forms,  but  only  a  sufficient  number  to  illustrate  the 
proper  use  of  the  forms.  The  complete  transactions  necessary 
to  gain  a  comprehensible  trial  balance  are  as  follows: 

Raw  materials  purchased : 

From  Henry  Jones $    212.50 

From  Elmer  Frank 1,050.00 

From  Allan  Beers 125.00 

From  Thomas  Bost 51.75        Total,  $1,439.25 

Supplies  purchased: 

From  Clyde  Hawley $  100.25 

From  Albert  Low 47.50 

From  George  Andrews 95.00        Total,     $242.75 

Expenses  incurred : 

Through  Daniel  Riggs $  15.50 

Through  Hawley  Smith 32.00 

Through  Samuel  Adams 105.00        Total,     $152.50 

The  payroll  for  the  month  amounted  to  $1,639.75,  which 
was  paid  in  cash. 

Interest  accrued  was  $41.67. 

The  entries  from  the  various  books  of  original  entry  would 
be  posted  to  the  ledger  accounts  which  in  complete  form  would 
be  as  shown  in  Forms  S34  to  S45  inclusive. 

The  resultant  trial  balance  as  of  March  31,  reads  as  in 
Form  S46. 


/ 


80 


BUSINESS  ACCOUNTANCY 


(Ledger)                                            Cash 

Date 

Items 

Vol. 

Debit 

Date 

Items 

Fol. 

Credit 

Mar. 
Apr. 

1 
1 

Balanoe 
Balanoe 

9 

200 

00 

Mar, 

■ 

31 
31 

Payroll 
Balanoe 

1 
7 

639 
560 

75 
25 

9 

200 

00 

9 

200 

00 

7 

56o 

25 

Form 

S-3 

t\ 

(Ledger) 


Buildings  and  Equipment 


Fol. 


Debit 


Date 


Items 


Fol. 


Credit 


Form  S-35 


18  500  oc 


(Ledger) 

Furniture  and  Fixtures 

Date 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Mar. 

Form 

1 
S- 

Balance 
361 1 

900 

00 

(Ledger)                                  Materials  and  Supplies 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Mar. 

■ 

■ 

1 
31 

Balance 
Charge  Reg'r 
Charge  Reg'r 

8 

1 

450 
439 
242 

00 
25 
75 

Form 

S-. 

57  ~) ._^_ 

PURCHASING 


81 


(Ledger)                                  Capital  stock  Unissued 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Mar. 

1 

Balance 

69 

700 

00 

Forn 

iS 

38  i 

(Ledger)                                       Payroll 

Date 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Mar. 

■ 

31 
31 

Balance 
Cash 

2 

1 

167 
639 

50 
75 

Fornr 

iS- 

39  i — - ' 

(Ledger) 


Expense 


Date  Items  Fol 


Debit 


Date 


Items 


Fol, 


Credit 


Bar. 

H 


Balance 
Charge  Reg'r. 


782  50 
152  50 


(Ledger) 


Interest 


Date     Items     Fol.     Debit    Date    Items   Fol.    Credit 


Mar. 


Balance 
Mortgage 
Payable 


Form  S-41 


ITL 


343  67 
43  67 


(Ledger)                                     Bond  and  Mortgage 

Date 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Mar. 

1 

Balance 

10 

000 

00 

Form 

S- 

dO  j  - 

82 


BUSINESS  ACCOUNTANCY 


Interest  Accrued 


Debit 


Date   items 


Fol. 


Credit 


Mar, 


27 


Ealance 
Mortgage 
Payable 


(Ledger)             Capital  Stock  Authorized 

Date 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Mar. 

1 

1,000 

shares 
$100  each 

LOO 

00C 

00 

Forrr 

iS- 

44  i 

(Ledger) 

Accounts  Payable 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Form  S- 

45T— ~ 

Mar. 

21 

Charge 
Beg'r. 

1 

334 

50 

Trial  Balance 

Date:  March  *1,  1918 

Debit 

Credit 

Cash  on  Hand 

7 

560 

25 

Bond  and  Mortgage 

10 

000 

00 

Suilding6  and  Equip- 
ment 

18 

500 

00 

Interest  Accrued 

83 

3* 

Furniture  and  Fix- 
tures 

900 

00 

Capital  Stock  Authorized 

100 

000 

00 

Materials  and  Supplies 

10 

132 

00 

Accounts  Payable 

1 

834 

50 

Capital  Stock  Unissued 

69 

700 

00 

Payroll 

3 

807 

25 

Expense 

935 

00 

Interest 

Total 

383 

34 

Total 

HI 

917 

84 

111 

917 

84 

Form  S-46  I .. — ^_ 

CHAPTER  VI 

HANDLING  ACCOUNTS  PAYABLE 

IN  the  preceding  chapter  we  took  purchases  through  the  order, 
receipt,  entry,  to  the  credit  of  the  individual  from  whom 
purchased,  and  the  distribution  to   the  proper  business 
account.    Now  comes  payment. 

The  elaboration  of  the  machinery  of  payment  will  depend 
upon  the  size  and  character  of  the  transactions,  but  as  in  all  such 
matters,  the  principles  remain  identical  regardless  of  the  nature 
of  the  business  or  whether  the  bills  paid  amount  to  $100  or 
$500,000  a  month.  In  the  smaller  concern  the  payment  will  be 
by  the  check  of  the  owner;  in  the  larger,  by  the  treasurer,  and  in 
the  very  large  corporation  the  comptroller  will  supervise  all 
payments  for  merchandise. 

Cooperation  Necessary.  A  main  point  is  to  coordinate 
buying  and  paying.  Goods  should  not  be  bought  without  a 
prospect  of  paying  for  them  and,  therefore,  the  purchasing 
department  and  the  treasurer's  or  comptroller's  department 
sjiould  always  be  in  touch  with  each  other.  As  said  before,  these 
departments  may  be  contained  in  one  individual.  In  many  large 
corporations,  orders  by  the  purchasing  agent  exceeding  a  fixed 
gross  sum  must  have  the  vise  by  the  comptroller,  in  order  that 
commitments  may  not  be  entered  into  in  excess  of  expected 
income,  or  in  the  case  of  a  very  large  commitment,  that  the 
financing  may  forehandedly  be  arranged. 

The  invoice  is  up  for  payment.  Attached  to  it  is  a  duplicate 
of  the  purchase  order,  on  which  the  receiving  clerk  has  noted 
the  quantities  which  actually  have  come  to  him.  This  con- 
stitutes an  authorization. 

Payments  then  divided  themselves  very  naturally  into  two 
classes.  The  first  classification  comprises  the  bills  or  invoices 
which  carry  a  cash  discount  if  paid  within  a  certain  time,  gen- 
erally 10  days,  and  the  other  class  includes  the  bills  which  do 
not  permit  of  such  a  discount. 

83 


84  BUSINESS  ACCOUNTANCY 

Cash  Discounts.  The  cash  discount  should  be  taken; 
money  can  seldom  perform  a  greater  earning  service.  Look  at 
the  interest  equivalents: 

1%  in  10  days  in  a  30-day  bill  means  18%  per  year.  Take  a  SI, 000  invoice: 
the  seller  pays  810  for  the  use  of  the  money  for  20  days — he  offers  that  premium 
for  paying  the  debt  20  days  before  it  is  due.    This  is  18%  a  year. 

2%  in  10  days  on  a  60-day  bill  equals  14.4%  per  year. 

6%  for  cash  in  30  days  on  a  6-month  bill  is  14.4%  per  year. 

4%  in  30  days  on  a  4-month  credit  is  16%  per  year. 

6%  in  60  days  on  a  6-month  line  is  18%  per  year. 

The  keen  business  man  takes  discounts ;  bankers  presume  that 
the  money  which  they  lend  is  for  this  purpose.  The  trader  whose 
statement  does  not  show  a  practice  of  discounting  will  have 
trouble  in  obtaining  loans  no  matter  how  good  his  statement — 
he  will  be  stamped  as  not  alive  to  commercial  advantages  and 
therefore  not  a  good  moral  risk. 

The  Maturity  File.  The  invoices  as  received  from  the 
purchasing  department  are  either  filed  alphabetically  (as  was 
described  in  the  previous  chapter)  or  placed  in  a  maturity  file. 
If  filed  by  the  name  of  the  creditor,  a  card  should  be  made  out 
at  the  time  of  filing,  containing  the  date  when  the  payment  of 
the  invoice  is  due.  If  a  card  be  provided  for  each  day,  there 
will  be  a  constant  reminder  of  what  should  currently  be  paid. 

The  maturity  file  is  divided  into  two  sections,  one  section  for 
the  invoices  on  which  discount  can  be  taken,  and  the  other  for 
the  no-discount  bills. 

The  payable  invoices  thus  appear  each  day;  after  a  check  has 
been  drawn,  they  are  stamped  "paid"  and  filed. 

It  is  desirable  to  fix  a  semimonthly  pay  day  for  all  accounts 
which  do  not  carry  a  discount,  and  to  use  the  full  limit  of  credit 
permitted  on  each  non-discountable  invoice.  For  instance,  if  a 
bill  is  payable  in  30  days,  put  it  in  the  payment  date  nearest  to 
30  days.  Sometimes  this  will  be  5  or  6  days  over  the  30  days  or 
again  it  may  be  a  few  days  under,  but  the  average  payment  will 
be  30  days.  Stated  pay  days  are  of  importance.  They  not  only 
increase  the  interest  on  bank  balances  but  also  save  the  time  of 
the  executive  who  signs  the  checks. 

The  interest  on  bank  balances  is  not  a  trivial  matter.  If  you 
will  calculate  the  amount  of  money  that  you  disburse  in  the 
course  of  a  year,  you  will  discover  that  even  though  your  business 
be  comparatively  small,  the  total  disbursements  will  be  astound- 


ACCOUNTS  PAYABLE  85 

ingly  large.  If  you  can  retain  a  considerable  average  balance  by 
reason  of  taking  the  full  credit  on  your  bills,  the  interest  thereby 
gained  is  far  from  insignificant  and  it  is  absolutely  clear  profit. 

One  of  the  large  manufacturers  of  linoleum,  whose  disburse- 
ments run  from  $300,000  to  $400,000  per  month,  makes  his 
deposits  daily  and  pays  once  a  month.  He  thus  has  an  average 
balance  through  15  days  of  about  $200,000,  which  nets  him  more 
than  $1,000  a  year.  The  large  department  stores  seldom  pay 
more  than  once  a  month  and  since  the  bulk  of  their  sales  are 
cash  transactions,  the  interest  on  bank  deposits  amounts  to  a 
very  considerable  profit  item. 

Delaying  payment  until  the  full  term  of  credit  has  expired  is 
an  easy  source  of  revenue.  At  the  same  time  it  should  not,  in 
fairness,  be  abused;  it  is  neither  fair  nor  good  business,  and  will 
not  in  the  end  be  profitable  to  exceed  the  terms  of  payment — to 
take  60  days  on  a  30-day  bill  and  then  endeavor  to  get  the  cash 
discount  is ' '  sharp  "  practice.  The  exact  terms  of  invoices  will  give 
sufficient  profit  without  venturing  into  the  zone  of  dishonesty. 

Methods  of  disbursement  have  changed  greatly  within  the 
past  10  years,  and  today  the  ordinary  form  of  bank  check  is  used 
only  by  those  who  have  not  kept  pace  with  the  improvements  in 
the  way  of  labor  saving  and  safety.  New  paying  devices  can  be 
divided  into  two  general  classes — those  for  the  payment  of 
merchandise  accounts  and  those  for  the  payment  of  wages. 

Payment  Procedure.  Not  a  few  houses  still  cling  to  the 
ancient  form  of  bank  check.  The  reasons  are  often  purely 
sentimental  but  now  and  again  a  more  or  less  plausible  argument 
is  put  forth.  In  one  very  large  carpet  establishment,  the  general 
manager  insists  that  he  likes  to  see  the  check  stub  as  well  as  the 
check  and  to  inform  himself  that  both  are  carefully  written — he 
distrusts  the  typewriter  for  all  matters  of  accuracy  just  as  many 
lawyers  will  not  pass  deeds  unless  they  are  made  by  a  scrivener. 

The  hand  method  entails  (1)  writing  the  check,  (2)  writing 
the  stub,  (3)  entering  in  the  cash  book.  Here  are  three  operations 
and  all  slow  because  they  are  performed  purely  by  hand.  It  is 
as  important  to  save  labor  in  the  counting  office  as  in  the  shop; 
the  modern  method  uses  the  typewriter  and  consolidates  the 
whole  performance  into  one  operation  through  the  voucher  check. 

Voucher  Checks.  There  are  many  forms  of  voucher 
checks  and  there  is  no  considerable  choice  between  them — 
it  is  largely  a  matter  of  taste  and  particular  exigency.     Forms 


Accounts 
Payable 


Amount 
Paid 


no.  43691 


Brought  Forward 


no.  43692 


Brought  Forward 


Statement                    i  No.  43691 
Attached  check  is  In  payment  of  the  fol-  ; 
lowing  Itemt.Receipt  is  not  required.      •    _ 


.191 


Bank 


RECEIPTS 


Debit 
Cash 


Credit 
Accounts 
Received 


Debit 
Discount 


Debit 
Aiiow'cs 


Account     /    Debit     Credit       Q 


FORMS  28-29-30:  These  forms  make  up  what  19 
considered  a  very  effective  voucher.  The  bottom  form 
is  printed  on  the  reverse  side  of  the  voucher.  The 
name  of  the  payee  and  his  address  appear  on  the 
body  of  the  check  in  such  a  position  that  an  '  'out- 
look" envelop  can  be  used.  The  vouchers  are  un- 
bound and  are  printed  three  or  five  to  a  page  as  desired. 


86 


ACCOUNTS  PAYABLE  87 

28,  29,  and  30  are  good.  These  are  unbound  and  may  be  printed 
three  or  five  to  the  page  as  desired.  The  stub  is  perforated  and 
on  it  are  typed  all  the  necessary  data — a  description  of  the 
invoice,  where  entered  on  the  books  of  record,  and  any  allowances 
or  discounts;  the  final  amount  must  agree  with  that  on  the  check 
proper.  The  stub  is  sent  with  the  check  and  is  detached  by  the 
creditor  before  depositing.  It  forms  a  statement  to  him  of  the 
whole  reason  for  the  payment.  The  name  of  the  payee  and  his 
address  appear  on  the  body  of  the  check  in  such  position  that 
an  "outlook"  envelop  can  be  used  for  mailing.  The  use  of  an 
outlook  envelop  is  again  a  matter  of  taste — many  careful  firms 
use  them  and  other  equally  careful  firms  abhor  them.  Of  course, 
there  is  always  the  danger  of  theft  in  an  outlook  envelop  because 
the  thief  is  informed  in  advance  that  it  contains  a  check — but, 
on  the  other  hand,  a  business  check  is  seldom  of  much  use  to  the 
malefactor.    There  is  a  deal  to  be  said  on  either  side. 

A  carbon  copy  of  the  stub  and  check  is  made  at  the  time  of 
its  drawing  and  this  copy,  being  punched  suitably,  is  bound 
into  a  cash  book,  forming  the  disbursement  side.  The  duplicate 
is  ruled  to  take  in  appropriate  columns  the  necessary  allowances, 
discounts  and  other  possible  deductions,  the  amounts  to  be 
charged  accounts  payable,  and  finally  the  net  amount  paid. 

Not  only  is  this  form  of  check  and  its  entering  made  in 
less  than  one  third  of  the  time  taken  by  the  older  method  but  the 
possibility  of  error  is  lessened;  error  increases  with  opportunity; 
there  is  more  chance  of  error  in  three  operations  than  in  one. 

The  voucher  feature  of  this  check  has  been  criticised  in  that 
it  does  not  give  a  true  receipt.  When  the  voucher  stub  is  torn 
off,  there  is  nothing  to  show  for  what  the  check  was  given  or 
received  and  therefore,  it  is  urged,  it  cannot  be  an  absolute 
receipt  according  to  the  tenor  of  the  voucher.  The  fundamental 
idea  of  a  voucher  is  that  it  should  be  self-explanatory; 
undoubtedly  the  check  from  which  the  voucher  is  torn  before 
deposit  is  not  self-explanatory,  for  its  whole  story  is  not  complete 
until  the  voucher  portion  is  restored.  The  point  is  not  of  high 
importance;  it  usually  arises  when  a  debtor  has  endeavored  to 
make  an  arbitrary  deduction  from  an  account  on  which  there 
was  no  dispute,  and  has  sent  a  check  for  a  smaller  amount  than 
that  due,  with  the  words  "in  full  settlement."  The  general 
law  is  that  the  payment  of  a  smaller  sum  is  not  satisfaction  for 
a  greater,  unless  there  be  a  bona  fide  dispute  as  to  the  correctness 
of  the  greater  amount.    In  the  absence  of  a  dispute  the  law  holds 


88  BUSINESS  ACCOUNTANCY 

that  no  consideration  exists  to  sustain  a  contract  to  take  a  smaller 
sum  and,  therefore,  the  creditor  may  take  the  check,  use  the 
proceeds,  and  bring  action  for  the  balance. 

A  form  in  which  all  the  reasons  therefor  are  contained  in  the 
body  of  the  check  is  shown  in  Form  31.  This  check  has  its 
receipt  advantages,  but  it  requires  much  more  labor  than  the 
old  style  plain  check.  Probably  the  user  will  lose  more  money 
through  extra  labor  than  he  will  save  through  an  added  safety. 


ThU  choek  It  In  urttiement  of  ■ 

tho  following  in»oio«$  ■         j  NO 

Date     »  Amount  i 

r— * ?■.  ■•  '  ; — 


_191, 

PAY  TO  THE  ORDER  OF 


•    __  Total  of  invoices  ]:.     .  .  •-,[., .  ,,  — — — : — r— — - — — - — — — — — __«»— — — ~ — - 

Lot*. '".  dlicc'inil _J j 

t«*>i»ht) 0— i ; DOLLARS 

T i>tal  deduction*; ..L...t 

■  Li-_i^Qy?V.I!t  of  check  !j "  I      j 


Form  31  E£ 


Special  Voucher  Check  Forms.  One  popular  form  is  an 
elongation  of  the  ordinary  check,  space  being  added  to  contain 
the  desired  data  or  the  statement  of  account  for  which  the 
company  wishes  a  receipt.  The  form  is  inconvenient  and  is 
objected  to  by  the  banks.  Checks  in  the  business  world  are  of 
an  approximately  uniform  size ;  the  extra  length  of  this  big  check 
protrudes  and  must  be  folded  back  and  the  flap  through  frequent 
handling  becomes  torn  and  dilapidated  and  not  seldom  limps 
home  patched,  pasted,  and  generally  disreputable. 

Another  type  is  similar  to  the  regular  bank  check,  but  has  a 
voucher  form  on  the  back.  While  convenient  to  persons  handling 
a  large  volume  of  checks,  there  is  a  banking  objection  in  that,  if 
it  has  to  go  through  many  banks,  enough  space  is  not  left  to  record 
the  successive  indorsements  and  one  impression  may  be  placed 
on  top  of  another  which  would  complicate  the  determining  of 
the  order  of  responsibility  in  the  case  of  non-payment. 

A  practical  objection  to  having  the  reason  for  issue  on  the 
face  of  the  check  is  that  neither  the  payer  nor  the  payee  cares  to 
have  his  banking  house  so  intimately  acquainted  with  either  the 
destination  or  the  source  of  his  funds.  The  dislike  of  disclosing 
the  reason  for  the  check  and,  therefore,  the  possible  disclosing 
of  business  secrets  is  usually  an  objection  so  great  as  to  overcome 


ACCOUNTS  PAYABLE  89 

the  slight  additional  protection  which  this  form  may  afford  in 
the  case  of  forgery. 

The  large  square  combination  voucher  and  check  has  been  very 
popular;  it  fulfils  all  the  requirements  or  needs  of  any  individual 
or  company.  The  principal  objection  comes  from  the  bankers, 
and  is  a  practical  one.  The  sheet  must  be  folded  for  convenient 
handling  and  other  checks  are  liable  to  slip  in  between  the  folds 
and  be  omitted  in  calculation  or  otherwise  overlooked.  A 
check  is  a  bank's  receipt  for  the  money  which  it  has  paid  out  and, 
failing  to  produce  the  check,  it  may  not  be  able  to  sustain  the 
payment.    A  missing  check  greatly  upsets  a  bank's  day. 

Check  Protection.  The  man  who  has  been  accustomed 
to  the  old  form  of  check  generally  asks:  "What  protection  have 
I  against  fraud  or  forgery  when  a  check  is  written  on  the  type- 
writer?" The  point  was  sound  until  the  introduction  of  the 
protectograph — of  which  there  are  several  excellent  makes. 
The  typewriter  operator  now  fills  in  only  the  numerals;  the 
words  are  printed  by  a  protectograph  and  "raising"  them  is 
very  difficult — the  words  and  not  the  figures  govern  the  amount 
of  a  check.  Of  course  no  scheme  can  ever  be  devised  to  wholly 
prevent  human  dishonesty — that  is  an  impossibility.  But  the 
modern  check  is  as  safe  from  alteration  as  a  written  instrument 
well  can  be. 

A  countersignature  on  all  checks  is  required  by  prudent 
organizations,  but  it  is  a  sheer  waste  of  time  to  insist  that  a 
large  number  of  signatures  be  added.  I  know  one  corporation 
which  provides  for  17  signatures — which  means  that  the  time  of 
17  presumably  important  executives  is  taken  from  the  perform- 
ance of  their  regular  tasks  to  the  merely  clerical  occupation  of 
adding  a  signature — for  when  many  sign,  none  investigate. 
If  the  signatures  are  necessary  to  verify  the  correctness,  then 
the  auditing  and  comptroller's  departments  are  lax. 

Petty  Cash  Payments.  Payments  of  small  bills,  the  limi- 
tation of  which  is  generally  set  at  $10,  are  often  made  from  what 
is  known  as  "petty  cash."  This  involves  either  the  cash  itself 
or  a  petty  cashier's  check.  In  the  latter  case,  the  cashier  instead 
of  carrying,  say  for  example,  $500  in  cash,  will  have  his  individual 
bank  account  and  will  issue  checks  against  it,  no  check  being 
more  than,  say,  $10.  The  checks  after  being  audited  and 
reconciled  with  the  bank  account  are  attached  to  the  invoices 
and  turned  over  to  the  treasurer's  department.     Where  checks 


90  BUSINESS  ACCOUNTANCY 

are  not  used  a  form  of  petty  cash  voucher  or  petty  cash  receipt, 
as  Form  32,  is  desirable. 

At  the  end  of  the  month  the  cashier  files  the  vouchers  or 
receipts  in  an  envelop,  Form  33,  and  records  the  figures  as  well 
as  their  distribution  on  the  outside.  The  items  on  the  individual 
vouchers  are  entered  and  distributed  to  their  proper  departments. 
This  total  is  turned  over  to  the  treasurer  who  enters  it  as  a  petty 
oash  disbursement  in  one  item  and  returns  a  check  to  the 
cashier  in  the  same  sum  to  make  up  the  amount  between  the 
disbursements  and  the  standard  balance  adopted  for  the  cashier. 


Received  from 

Cashier 

Dollars 

For 

$ 

191 

Form  ?9  | 

Petty  cash  is  the  bugbear  of  business;  it  is  the  hardest  to 
keep  down  in  amount  and  the  easiest  in  which  to  commit  fraud. 
As  a  means  of  protection  to  the  company's  interest,  the  vouchers 
when  placed  in  the  envelop  and  turned  over  to  the  treasurer 
should  be  audited  and  an  approval  placed  on  each  individual 
voucher.  In  the  writer's  experience  the  man  higher  up  has 
often  such  confidence  in  his  cashier  that  he  will  not  examine  the 
detail  of  the  vouchers  and  often  not  even  open  the  envelop. 

Cashiers  have  been  able  to  defraud  their  companies  of  many 
thousands  of  dollars,  through  the  lax  performance  of  the 
superiors.  Close  executive  supervision  of  petty  cash  will  un- 
doubtedly tend  to  eliminate  fraud,  but  there  is  a  question 
whether  the  time  of  an  executive  can  well  be  devoted  to  such  a 
small  matter.  However,  this  apparently  small  matter  may  run 
into  very  large  figures.  The  ultimate  check  on  errors  or  dis- 
honesty in  the  petty  cash  will  be  found  in  the  analysis  of 
expense,   or  through  the  cost  system  given  in  later  chapters. 


ACCOUNTS  PAYABLE 


91 


The  Payroll.  In  some  lines  the  payment  of  the  labor  is 
the  largest  single  expense,  while  in  others  it  is  relatively  insignifi- 
cant as  compared  with  the  total  volume  of  transactions. 
However,  in  every  case  the  payroll  is  a  more  or  less  awkward 
matter  with  which  to  deal. 

Quite  aside  from  the  question  of  getting  a  dollar's  worth 
of  work  for  a  dollar  expended  is  the  further  question  of  seeing 
that  the  dollars  paid  are  actually  devoted  to  the  payment  of  an 
individual  for  services  rendered — that  is  common  honesty  in 
disbursing  the  wage  funds.  Dishonesty,  unfortunately,  is  not 
particularly  uncommon  when  the  number  of  employees  becomes 
so  large  that  their  identities  are  unknown  to  the  executives. 


PETTY  CASH 

Pairl  hv  r.hfir.k  No. 

From                                To                                   Book  entry  Nc 

i- 

Express 

Postage 

Carfare 

Etc. 

Etc. 

Sundries 

Account 

Amount 

Forrr 

i3 

i 

Totals 

The  payroll  has  thus  two  phases.  First;  getting  the  money 
to  those  who  should  receive  it  and  to  no  others.  Second,  account- 
ing and  apportioning  the  moneys  paid,  in  order  that  they  may  be 
charged  to  the  proper  department  or  article. 

The  Manner  of  Payment.  The  fraudulent  opportunities 
in  the  payroll  are  many.  Aside  from  stealing  the  currency  in 
bulk — which  is  a  police  and  not  an  accountancy  matter — the 


92  BUSINESS  ACCOUNTANCY 

most  frequent  frauds  arise  out  of  conspiracies  between  the  pay- 
roll clerks  and  the  superintendents  or  foremen  by  which  they 
create  dummy  employees.  It  is  almost  impossible  to  prevent 
dishonest  men  in  positions  of  trust  from  cheating  on  the  payroll. 
Proper  accountancy  will  quickly  show  an  executive  an  undue 
increase  in  labor  in  any  department  and  will  therefore  promote 
an  investigation  which  will  disclose  that  mythical  individuals 
are  receiving  wages;  but  this  is  a  remedy  which  can  be  applied 
only  when  the  illness  has  appeared  and  it  is  preventive  merely 
to  the  extent  that  the  conspirators  must  carefully  watch  to 
see  that  they  do  not  steal  enough  to  make  a  serious  difference  on 
the  records. 

The  best  safeguard  against  fraud  is  the  payment  of  labor  by 
individual  check.  In  several  states,  by  statutory  enactment, 
wages  must  be  paid  in  cash  and  the  better  methods  are  out  of 
the  question.  The  objection  to  payment  by  check  is  that  the 
average  employee  does  not  maintain  a  bank  account  and  he 
feels  forced  to  cash  his  check  at  some  business  house  by  favor, 
or  possibly  in  the  corner  saloon.  Banks  will  not  cash  checks  for 
unidentified  strangers.  In  a  few  flagrant  cases,  dishonest 
employers  have  arranged  that  their  wage  checks  shall  be  cashed 
only  at  a  discount  in  which  they  secretly  share:  this  outrageous 
proceeding  has  not  been  uncommon  amongst  construction  gangs 
in  remote  sections. 

The  difficulty  of  cashing  the  check  can  easily  be  met  by 
providing  funds  at  the  plant  and,  although  this  is  annoying 
it  is  not  a  particularly  serious  or  expensive  affair  unless  the 
number  of  employees  be  very  great. 

The  safety  in  the  payroll  check  is  that  each  employee,  when 
taken  on  is  required  to  put  an  identifying  signature  upon 
a  register.  Before  his  pay  check  may  be  cashed,  he  must  in- 
dorse it  and  this  indorsement,  being  compared  with  the  regis- 
tered signature,  is  insurance  against  the  dummy  employee  game. 

How  One  Big  Payroll  Was  Handled.  A  moving-picture 
company  with  a  payroll  totaling  nearly  81,000,000  a  year,  felt 
that  it  was  spending  too  much  for  labor — that  they  were  paying 
for  work  they  did  not  get.  Ample  chance  for  fraud  existed; 
the  greater  number  of  their  employees — supers,  carpenters, 
actors  and  actresses — were  hired  from  day  to  day  as  the 
pictures  required.  The  average  term  of  employment  was  scarcely 
a  month.     With  such  shifting  labor,  the  interjection  here  and 


ACCOUNTS  PAYABLE  »8 

there  of  a  dummy  would  scarcely  be  noticed  and  especially  as  the 
pictures  were  made  at  various  studios  throughout  the  country. 
They  had  been  in  the  habit  of  paying  cash;  the  treasurer 
would  draw  a  single  check  for  the  entire  amount  of  the  payroll 
and  then  distribute  the  individual  amounts  in  envelops  to  the 
foremen  to  be  delivered  to  the  employees.  They  decided  to 
install  a  check  system.  When  an  employee  was  taken  on,  he 
was  asked  to  sign  a  register  and  when  the  paid  check  came  back, 
the  cashier  compared  the  indorsement  with  the  recorded  signa- 
ture. That  company  saved  $15,000  in  the  next  12  months. 
Someone  had  probably  been  padding  the  payrolls — otherwise  the 
saving  would  not  have  at  once  appeared. 


q  nr.PT.    16 


Week  Ending  Sept  .10  1917 


O     CHECK  NO.      724 
O 

"       •        726 
O 


NAME 


Minnie  Jones 
Rosie   Schramm 
Jane  Fowle 


Productive 
Labor 


7.60 


7.20 


Non- 
productive 


7.oo 


PAYROLL 
CHECK 
NO_Z26_ 


Pey  to  the  Order  of. 


Forms    \z 
34-35 


MILLER,  FRANKLIN,  BASSET  &  COMPANY 

NEW  YORK  CITY 


Productive 
Labor 


Jane  Ptrwle 


7.20 


7.20 


SEVEN  DOLLARS   TWENTY  CENTS  ♦♦»»»♦»» 


.NATIONAL  BANK 


NEW  YORK  CITY 


MILLER,  FRANKLIN.  BASSET  &  COMPANY 
By 


o 


The  exact  form  of  a  payroll  check  is  a  matter  of  individual 
discretion.  The  improved  forms  provide  for  the  distribution  of 
the  wages  to  the  proper  account  at  the  time  of  writing  the 
check  on  the  typewriter  and  at  the  same  time  make  out  the  pay- 
roll sheet.  In  Forms  34  and  35  are  columns  for  the  various 
sections  of  the  business  to  which  labor  should  be  charged  and 
the  amount  of  the  check  is  carried  out  to  the  proper  column. 
The  headings  of  these  columns  and  their  number  will,  of  course, 
depend  upon  the  nature  of  the  business,  and  they  can  be  elabo- 
rated to  any  reasonable  extent. 

The  payroll  sheets  serve  exactly  the  same  purpose  as  the 
duplicate  sheets  in  the  check  system  for  paying  merchandise 


94 


BUSINESS  ACCOUNTANCY 


accounts.  Adding  the  distribution  of  each  sheet  on  the  adding 
machine  will  give  the  total  departmental  payroll  with  a  minimum 
of  effort. 

The  checks  are  written  from  the  payrolls  of  which  repro- 
ductions are  shown  in  Forms  36  to  39  inclusive,  or  they  can  be 
written  direct  from  the  clock  or  other  time  cards.  The  sub- 
divisions will,  of  course,  follow  the  business,  but  the  point  is 
that  the  payroll  should  contain  all  the  needful  information 
about  the  employees  for  future  reference.  The  slip  sheet  obvi- 
ates the  necessity — otherwise  a  great  burden  in  a  large  plant — 
of  each  week  making  a  fresh  copy  of  the  names,  and  it  also 
provides  a  guide  to  the  labor  turnover.  Say  10  men  are  in  a 
gang;    the  names  of  these  men  will  be  placed  on  the  master 


PAYROLL 


Forms  35-37 


PAYROLL 

1 

H 

MAN 

Mi 

NAME 

Rate 

SbU~j~^«°u-  _^§^^c\1 

i      __^=?===^"7   \    ^— 2---1     Son-     \  total  v            Ja«*rT     \     \ ■ \ — \       \     t 

h— XZ*t»*  \  *  tci^M^tVn^^srJr^YS- — HfX^---H~~"Ytl 

LI    H«"s    \               Y-^^r^^T       \        \ V — T          \      J — — \     r     \     i V— T       \ 

\\ 

!  r~ 

-^^n 

i    t"" 

-^^-V^f^-1^^           — L-1 -1 

Forms  38-39 

o 

PAYROLL  SUMMARY 

Week  Ending 

Department 

Hours 

Wages 

P.  W. 
Earn. 

Ino.9 
per 
Hour 

% 
Piece 
Work 

% 

Non- 
produc- 
tive 

No. 
Men 
Paid 

No.  Men 
Same 
Week 

Last  Year 

Non- 
Pro- 
due- 
tivt 

Productive 

Total 

Non- 

Pro- 
duc- 
tive 

Productive 

Bonus 

TQtal 

De- 
duc- 
tions 

Net 

Pay 

Day 

Work 

Piece 
Work 

Day 
Work 

Piece 
Work 

FORM  40:    This  is  another  style  of  payroll 
with    departmental    divisions    for    the    various 
classes.     It  permits  the  giving  of  rewards  and  the 
dropping  or  the  changing  of  employment  of  any 
employee  at  any  time  with  an  exact  knowledge  of 
performance,  both  in  day  work  and  piece  work. 

— ■ 

o 

o 

CASH  DISBURSEMENTS 

Pann  Nn. 

Month 
IB* 

Check  Nos. 

Credit 
Cash 

Debit 
Accounts 
Payable 

Credit 
Discount 

Credit 
Freight 

Credit 
Allowances 

Sundries 

From 

To 

Account 

Post 

Debit 

Credit 

FORM  41:     Here  is  shown  the   old-style    dis-     . 
bursement  record  with  all  of  the  details  of  the     - 
drawing    and    signing  of  any  particular  check.     : 
It  is  shown  only  to  illustrate  the  former  labor 
waste.     Payments  are  entered  on  the  cash  dis- 
bursement sheet  and  distributed  to  the  proper  bank 
accounts,  which  thus  fits  into  the  general  scheme. 

_ 

o 

1 — ' 

95 


Page  No.  _ 

CASH  RECEIPTS 

o 

MwiUi 

is 

Item 

Pod 

D»b«1 

Crtit 

i    Dei>it     •       Debrt      1 

Sundries 

Cask 

£^«  .Discount.  A..o..n«,; 

Account               (]  Post     Debit     Credit 

i 

! 

i 

i 

1 

! 

1 

: 

11      M 

- 

- 

— 

__ . - ■ : -■■'       :    -      — 

i —  t 

i      1 

o 

1 

■ 

• 

1 

• 

• 

" 

42I: 

1 

!        j 

Form 

J         3 

CASH  RECEIVED 

Page  No 

t 

-  o 

-  o 

i»i_ 

Cash 
Rec«i«c 

!      Bank  Distribution      "  Allnm 

Oo- 
count 

Accounts  Receivable    j           Sundries 

d 

3JV* 

Freight 

(Hti 

U'f 

i  Let 

r  Co 

ry-escK 
Wrist 

J^j  UtcountPost 

Oeb 

Cr»d 

1 

.      .          . 

! 

■ 

• 

1 

• 

, 

I 

'  : 

: 

~L 

■ 

[ 

. 

H 

FORM  43 :    He  is  another  form  that  may  offer 
accountants  some  helpful  suggestions  in  enter- 
ing cash  disbursements  and   distributing  them 
to  the  proper  bank  accounts.    The  operation 
of  this  form  is  quite  simple  and  is  identical  with 
that  of  the  others  described  in  this  chapter  and 
is  easily  adapted  to  almost  any  business. 

I 

■ 

" 

1 

I 

• 

, 

\ 

: 

; 

; 

'; 

L_ 

1 

96 


ACCOUNTS  PAYABLE  07 

sheet  and  a  line  drawn.  The  names  written  below  the  line  are 
of  men  taken  on  in  place  of  those  above  and  the  ratio  of  the  two 
lists  will  determine  the  labor  turnover.  If  10  names  have  been 
added,  the  turnover  is  100%.  When  we  consider  that  hiring 
and  firing  is  one  of  the  most  severe  cost  burdens  and  is  apt  to 
escape  notice,  the  opportunity  always  to  keep  track  of  the 
turnover  by  means  of  a  sheet  summary  is  most  valuable.  Labor 
turnover  should  be  the  subject  of  frequent  reports  for  executive 
examination. 

The  master  sheet  and  the  slip  sheets  taken  together  give 
a  complete  record  of  each  employee  and  permit  the  giving  of 
rewards  and  the  dropping  or  the  changing  of  employment  with 
an  exact  knowledge  of  performance,  both  in  day  work  and 
piece  work.  Form  40  is  another  style  with  the  departmental 
divisions  for  the  various  classes. 

The  Recording  of  the  Payments.  To  go  back  to  the 
payment  of  ordinary  bills:  The  check  has  now  been  drawn, 
properly  signed  and  countersigned.  The  invoice  which  it  pays 
is  stamped  "paid"  and  deposited  in  the  paid  voucher  file. 

Referring  to  the  cash  sheet  (which  is  the  carbon  copy  of  the 
check)  the  voucher  number  of  the  invoice  to  be  paid  by  the 
check  is  had.  This  number  locates  the  invoice  in  the  charge 
register;  we  compare  the  amount  as  entered  therein  with  the 
amount  on  the  check.  If  they  agree,  the  date  of  payment  is 
stamped  beside  the  number  on  the  charge  register,  and  a  mark 
is  made  after  the  amount  recorded  on  the  duplicate  cash  sheet 
to  show  that  the  comparison  has  been  made.  That  is  all  there 
is  to  the  accounting  of  the  payment. 

In  the  old  form  of  the  accounts  payable  ledger,  duplicate 
records  were  made  both  on  the  credit  and  on  the  debit  sides. 
The  same  record  has  now  been  accomplished  by  a  date  stamp  and 
the  check  of  a  pen  on  the  cash  book  sheet. 

In  Form  41  is  the  old-style  cash  disbursement  book,  with 
all  of  the  detail  of  the  drawing  and  signing  of  this  particular  check. 
It  is  shown  only  to  illustrate  the  former  labor  waste. 

The  payments  are  entered  on  the  cash  disbursement  sheet 
and  distributed  to  the  proper  bank  accounts.  One  of  the  great 
advantages  of  using  forms  such  as  these  is  that  the  bank 
account  or  accounts  very  readily  fit  into  the  general  scheme. 
The  method  of  operating  Forms  41,  42,  and  43  is  self-evident. 


93 


BUSINESS  ACCOUNTANCY 


THE  SPECIALTY  COMPANY 

The  transactions  for  the  month  in  the  history  of  this  com- 
pany to  show  the  principles  brought  out  in  this  chapter  follow: 

As  in  the  preceding  chapter,  only  a  portion  of  the  transactions 
are  carried  out  to  the  forms.  The  transactions  for  the  month 
in  full  are  assumed  to  be  as  follows : 

The  bills  below  noted  were  paid  throughout  the  month, 
owing  to  the   advantage  of  getting  important  cash  discounts. 

Elmer  Frank  was  paid $1,029.00  in  cash,  earning  a  discount  of     $21.00 

Allen  Beers  was  paid 122.50  in  cash,  earning  a  discount  of        2.50 

George  Andrews  was  paid ... .        93.10  in  cash,  earning  a  discount  of        1.90 

Hawley  Smith  was  paid 31.36  in  cash,  earning  a  discount  of  .64 

Interest  accrued  for  the  month 41.66 

Payment  of  3  months'  interest 125.00 

Payroll  for  the  month 1,581.25 

Purchases  for  the  month: 

Materials  and  supplies 1,985.40 

Expenses  incurred  during  the  month 649.85 

As  a  result,  the  appearance  of  the  ledger  accounts  are  as 
shown  in  Forms  S47  to  S59  inclusive. 


(Ledger) 


Cash  on  Hand 


Late 


I  tens 


Fol. 


Lebit 


Late 


Items 


Fol 


Credit 


Apr.  1 


May 


Balance 


Balance 


560 


$60 


578 


25 


Apr, 


25 


0i 


Interest 
Accrued 

Payroll 

Accounts 
Payable 

Balance 


125 
581 

275 

578 


560 


25 


(Ledger)             Buildings  and  Equipment 

Late 

Items 

Fol. 

Lebit 

Late 

Items 

Fol. 

Credit 

Apr. 

1 

Balance 

18 

50C 

0( 

Forn 

IS 

48  L -J 

ACCOUNTS  PAYABLE 


99 


(Ledger)                                      Furniture  and  Fixtures 

Date 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Apr. 

1 

Balance 

900 

00 

Fonr 

S- 

dol 

1 

(Ledger;                                      Materials  and  Supplies 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Apr. 
it 

l 
50 

Balance 
Charge  Reg'r. 

10 

1 

132 

985 

00 
40 

Font 

>S- 

50  1— 1 

(Ledger)                                  Capital  Stock  Unissued 

Date 

I  terns 

Fol, 

Debit 

Date 

Items 

Fol. 

Credit 

Apr. 

l 

Balance 

69 

700 

00 

Forrr 

iS- 

in 

(Ledger) 

Capital  Stock  Authorized 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Apr. 

1 

Balance 

100 

000 

00 

Forn 

iS 

■52 

(Ledger)                                        Bond  and  Mortgage 

"Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Apr. 

1 

Balance 

10 

000 

00 

Form  S 

„L 

■53  *» ' 

100 


BUSINESS  ACCOUNTANCY 


(Ledger)                                       Accounts  Payable 

Date 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Apr. 

• 

30 

Cash 
Balanoe 

, 

1 
3 

302 

167 

00 
75 

Apr. 

■ 

May 

1 
30 

1 

Balance 
Charge 
Reg'r. 

Balanoe 

1 
2 

834  50 
635  25 

4 

469 

75 

4 

469 

75 

I 

3 

167 

75 

Form 

S- 

HI          ■      - 

(Ledger)                                      Interest  Accrued 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Apr. 

27 

Cash 

125 

00 

Apr. 

M 

1 
27 

Balance 
April 
Interest 

83 
41 

34 

66 

Forn 

1S 

-<*V 

125 

OC 

125 

00 

(Ledger)                                           Payroll 

Date 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Apr. 

H 

1 
30 

Balanoe 
Cash 

, 

3 

1 

807 
581 

2; 
25 

Form 

S- 

56.1 1 

Fol. 


Expense 


Debit 


Date 


Items 


935 
649 


00 

85 


ACCOUNTS  PAYABLE 


101 


(  Ledger)                                    Interest 

Date 

it  eme 

Pol. 

Debit 

Date 

Items 

Fol. 

Credit 

Apr. 
ii 

1 
27 

Balance 
Mortgage 
Payable 

383 
41 

34 
66 

Form 

fl- 

5^—  1 

(Ledger)                                           Cash  Discount 

Date 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

Apr. 

30 

On  Pur- 
chases 

26 

04 

Forn 

iS- 

59  L— . 1 

The  trial  balance,  as  of  April  30,  is  shown  in  Form  S60. 


Trial  Balance 

Date:    April  10.    1018 

Debit 

Credit 

Cash  on  Hand 

4 

578 

04 

Capital  Stock  Author- 

ized 

100 

000 

00 

Buildings  and  Equip- 

ment 

IB 

500 

00 

Bond  and  Mortgage 

10 

000 

00 

Furniture  and  Fixtures 

900 

00 

Accounts  Payable 

3 

167 

75 

Materials  and   Supplies 

12 

117 

40 

Cash  Discount 

26 

04 

Capital  Stock  Unissued 

69 

700 

00 

Payroll 

5 

188 

50 

Expense 

1 

584 

85 

Interest 

Totals 

425 

00 

Totals 

113 

193 

79 

113 

193 

79 

Form  S-^0  '*          '       ,,,.., 

CHAPTER  VII 

HOW  ACCOUNTANCY  HELPS  SALES 

THROUGH  marketing,  the  commodity  is  exchanged  for 
money  or  its  equivalent.  The  process  may  be  simple  or 
complex;  the  most  complex  is  that  of  the  man  who  both 
makes  and  sells  goods,  the  simplest  is  that  of  the  broker  who 
buys  and  sells  without  ever  having  the  goods  in  his  actual  pos- 
session. No  questions  of  salesmanship  can  be  taken  up  in  this 
chapter  except  insofar  as  the  fundamentals  of  all  salesmanship 
are  concerned — having  the  rightly  priced  goods  ready  at  the 
right  time.  Neither  will  it  be  possible  to  take  up  all  or  even 
any  large  number  of  the  almost  infinite  divisions  of  the  market- 
ing question,  but  the  right  method  for  any  given  business  is 
merely  an  adaptation  of  the  general  principles  to  the  problem 
which  may  be  in  hand  at  the  time. 

Anyone  who  sells  may  find  in  this  chapter  a  method  for  his 
needs,  even  though  it  be  described  or  formulated  more  expressly 
for  some  business  other  than  his  own.  The  man  with  a  few 
large  sales  will  not  adopt  the  plans  of  the  small  department 
store;  neither  will  the  man  who  sells  services  need  the  accounts 
of  the  manufacturer.  But,  taking  this  or  that  plan  or  part  of 
a  plan  here  given,  anyone  can  undoubtedly  assemble  factors 
into  a  smoothly  working,  efficient  whole. 

If  we  assume,  for  the  moment,  that  the  dealer  knows  the 
base  price  of  the  commodity  which  he  is  offering — in  the  case 
of  the  merchant  this  will  be  the  price  which  he  must  pay  to 
put  the  commodity  in  a  position  to  sell  and  in  the  case  of  the 
manufacturer  it  will  be  the  production  cost — then  marketing 
divides  itself  from  an  accounting  standpoint  into  two  great 
divisions:   gross  sales  and  selling  expense. 

Profits  Require  Detail  Study.  Not  infrequently  all  the 
items  under  these  headings  are  lumped;  profits,  however,  are  a 
question  of  detail  study  and  any  accountancy  which  makes  for 
profit  in  marketing  must,  as  a  first  step,  install  a  system  which 

102 


SALES  ACCOUNTING  103 

will  so  exhibit  sales  and  selling  expense  that  every  phase  of  the 
operation  may  be  examined  with  exactness.  Most  business 
losses  arise  from  ignorance  and  self-deception;  marketing 
problems  simply  resolve  themselves  when  reduced  to  elements. 

The  Unit  of  Sale.  The  point  is  to  discover  the  profit  on 
individual  sales,  which  means  that  one  must  first  determine  the 
costs  on  individual  sales.  It  may  be  that  costs  are  too  high 
or  again  that  the  selling  price  is  too  low,  but  certainly  neither 
point  can  be  determined  unless  the  facts  are  known.  It  is  the 
function  of  accountancy  to  show  the  facts. 

The  unit  is  the  individual  sale;  too  many  managers  quite 
overlook  the  individual  transaction — they  like  to  contemplate 
sizable  volumes  and  not  the  paltry  single  sale;  consequently 
many  reputations  have  been  built  up  on  the  volume  sales  of 
"leaders"  on  which  the  profit  was  really  little  or  nothing. 

We  have  a  case  in  mind  of  a  Boston  paper  house.  The  point 
at  issue  was  how  to  increase  the  profits  of  the  business.  Sales 
were  good  but  profits  were  non-existent. 

The  real  trouble  lay  in  the  lack  of  system  showing  the  profit 
made  on  the  different  lines  handled.  Salesmen  were  paid  a 
commission  based  on  the  gross  sales,  and  though  the  results 
were  frequently  satisfactory  to  them,  they  were  working  in  the 
dark  as  far  as  the  company's  betterment  was  concerned. 

We  first  made  an  analysis  to  arrive  at  the  cost  of  the  different 
lines  of  paper  sold,  and,  as  a  result,  a  selling  plan  for  the  salesmen 
was  devised.  All  were  furnished  with  a  cost  sheet  and  a  mini- 
mum sales  price  list.  They  were  then  told  that  in  the  future 
their  commission  would  be  a  percentage  of  the  profits  and  not 
of  the  gross  sales.  In  other  words,  on  some  goods  that  were 
sold  practically  at  cost  to  enable  the  company  to  carry  a  com- 
plete line  and  meet  all  competition,  practically  no  commission 
was  paid.  On  others  a  commission  was  agreed  upon  so  that 
there  existed  an  incentive  to  the  salesman  to  sell  the  line  most 
profitable  to  his  house. 

The  plan  was  received  with  enthusiasm  by  the  sales  force, 
for  the  average  salesman  possesses  clear  perceptive  abilities, 
and  this  group  of  salesmen  realized  that  they  would  now  be 
able  to  exercise  judgment  to  their  own  as  well  as  to  the  com- 
pany's advantage. 

At  the  end  of  the  year  following  that  in  which  the  plan  was 
put  into  operation,  every  salesman  but  one  had  increased  his 


104  BUSINESS  ACCOUNTANCY 

own  return,  and  the  house  had  made  a  profit  of  about  $37,000, 
as  against  a  loss  in  the  preceding  year. 

Paying  Salesmen  on  a  Commission  Basis.  In  only  too 
many  companies  there  exists  an  unwillingness  to  pay  salesmen 
in  accordance  with  what  they  have  earned.  Even  manufac- 
turers who  are  willing  and  anxious  to  place  their  factory  workers 
upon  piece  work  or  some  similar  plan,  are  still  reluctant  to  apply 
the  same  principle  to  their  sales  force.  They  take  the  attitude 
that  a  salesman's  job  is  worth  so  much  money  and  no  more, 
with  the  result  that  they  are  obliged  to  stimulate  sales  by  other 
and  far  more  expensive  expedients. 

Paying  commissions  on  the  basis  of  profits  rather  than  gross 
sales  is  now  common  to  every  careful  business.  Indeed  many 
bond  houses  now  pay  on  a  sliding  basis — the  bonds  on  which  a 
profit  is  made  are  rated  on  a  commission  basis  while  the  others 
in  which  only  a  brokerage  fee  may  be  charged  are  not  counted 
in  the  commissions,  but  are  merely  marked  as  "credits"  to  the 
salesman  to  determine  his  standing  and  possibilities. 

Marketing  Divisions.     The  broad  divisions  of  selling  are: 

1.  The  manufacturer  who  sells  his  product  to  a  single  dealer, 
commission  merchant,  agent,  or  jobber.  His  sole  selling  expense 
is  the  commission  charge,  and  his  determination  of  whether 
or  not  it  is  more  profitable  for  him  to  sell  only  to  this  one  source 
or  to  market  on  his  own  account,  will  be  determined  by  whether 
he  can,  all  things  being  considered,  sell  at  a  lower  price  than  he 
pays  to  his  jobber  or  agent. 

2.  The  manufacturer  who  conducts  his  own  selling. 

3.  General  merchandising  or  the  purely  marketing  organi- 
zation. 

In  selling  through  a  single  source,  we  have  the  sale  of  the 
entire  product  to  a  single  jobber  at  a  fixed  price  or  the  sale  of 
the  entire  product  to  several  jobbers.  Then  we  also  have  the 
selling  agent  and  the  commission  agent. 

The  jobber  in  most  cases  buys  outright.  The  price,  and  all 
incidentals  are  closed  with  the  jobber  when  the  sale  is  made; 
then  and  there,  the  connection  of  the  manufacturer  with  the 
article  ceases,  except,  of  course,  as  to  such  returns  or  the  like 
which  may  subsequently  arise,  but  to  all  intent  the  sale  is  com- 
pleted when  the  goods  are  taken  over  by  the  jobber. 


SALES  ACCOUNTING  105 

The  selling  agent  may  or  may  not  be  an  actual  agent  of  the 
corporation.  If  he  be  an  actual  agent  he  is  in  the  position  of 
an  employee  who  pays  his  own  expenses  and  receives  a  commis- 
sion, and  as  such,  the  principal  and  not  the  agent  is  responsible 
for  his  contracts  and  engagements  within  the  scope  of  his 
appointment.  The  details  depend  upon  the  exact  contractual 
position  which  the  agent  holds  with  the  principal.  The  principal 
and  not  the  agent  is  responsible  for  non-delivery,  must  bear 
losses  upon  the  goods,  and  attend  to  the  collection  of  accounts. 
There  is  little  distinction  between  the  agent  directly  employed 
by  a  company  and  the  independent  selling  agent,  except  that 
in  the  case  of  the  latter,  he  pays  his  own  selling  expenses  and  is 
his  own  director. 

Sales  agents  are  appointed  for  various  reasons;  it  may  be 
that  the  manufacturer  has  not  the  capital  both  to  make  and  to 
market  his  line;  it  may  be  that  the  sales  agent  has  a  peculiar 
knowledge  of  the  market,  which  makes  his  services  of  great 
value;  or  again  an  agent  may  be  appointed  merely  so  that  the 
insiders  in  the  manufacturing  company  may,  through  partici- 
pation in  the  sales  agency,  make  a  profit  in  addition  to  that  made 
by  the  company.  The  last  reason  is  not  always  unfair;  it  quite 
often  happens  that  the  promoters  of  a  company  have  a  marketing 
as  well  as  a  manufacturing  knowledge  which  they  desire  separately 
to  capitalize  and  they  do  so  with  the  full  consent  of  the  share- 
holders in  the  manufacturing  end. 

Commission  Merchants  a  Big  Factor.  A  commission 
merchant  is  an  independent  contractor  with  the  company.  He 
sells  to  whomever  he  likes  at  the  best  price  he  can  obtain,  or  at 
a  prearranged  price,  and  the  company  is  not  responsible  for  his 
acts,  although  in  most  cases  he  does  not  assume  to  guarantee 
the  payment  of  the  accounts  for  the  goods  which  he  sells.  The 
commission  merchant  is  apparently  a  necessity  because  he 
brings  the  buyer  and  the  seller  together  when  they  might  other- 
wise have  great  difficulty  in  meeting;  he  is  in  the  nature  of  an 
open  market.  The  method  is  often  most  uneconomical  and 
interjects  a  considerable  element  of  chance  into  the  seller's 
affairs,  but  the  commission  man  is  and  bids  fair  to  continue  to 
be  the  largest  means  for  the  disposal  of  raw  material. 

In  every  case  the  market  medium  will  be  determined  by  the 
principal  on  the  grounds  of  expediency — what  is  most  profitable 
under  all  the  circumstances. 


106  BUSINESS  ACCOUNTANCY 

Selling  Expense  and  Selling  Deductions.  Unfortunately 
it  costs  money  to  sell,  and  again,  unfortunately  that  which  has 
been  sold  does  not  always  stay  sold,  because  the  goods  delivered 
may  be  defective  in  quality  or  damaged  in  transit.  That  expense 
which  is  entailed  in  the  actual  marketing  is  known  as  "  selling 
expense"  while  the  allowances  which  are  compelled  to  be  made 
in  order  legitimately  to  satisfy  the  customer  are  "sales  deduc- 
tions." The  distinction  is  important;  each  hits  into  the  profit 
from  operations,  but  the  first  expense  is  chargeable  properly 
to  the  physical  marketing  while  the  latter  is  a  charge  against 
manufacturing.  If  the  two  lines  be  confused,  the  accurate 
determination  of  where  executive  pressure  should  be  put  is  not 
possible  and  economies  may  be  attempted  in  the  wrong  place. 
But,  as  in  many  accountancy  matters,  fixed  rules  will  not  give 
the  continuously  correct  apportionment;  the  classification  of 
the  charge  is  to  be  determined  by  common  sense  under  the 
circumstances.  There  are  fixed  rules,  but  I  do  not  recommend 
that  they  be  rigidly  applied;  instead,  let  each  expense  be  traced 
back  to  its  source. 

If  the  expense  be  purely  one  of  salesmanship,  then  it  is  a 
selling  expense;  if,  on  the  contrary,  it  flows  from  something 
which  happened  in  or  had  to  do  with  the  manufacturing,  then  it  is 
a  selling  deduction  and  is  to  be  regarded  as  a  factory  cost. 

When  Is  Packing  a  Selling  Expense?  Packing  may  or 
may  not  be  a  selling  expense.  If  the  packing  is  that  which  goes 
directly  on  the  goods  such  as  the  jars  which  hold  fruit  or  the 
paper  boxes  containing  biscuits,  the  charge  is  against  the  cost 
of  the  goods,  for  they  could  not  be  sold  without  such  containers. 
Anything  that  is  part  of  the  product  for  purposes  of  identifica- 
tion, as  individual  wrappers  or  containers,  are  factory  deduc- 
tions, or  rather  are  an  integral  part  of  manufacturing  cost. 

Packing  for  shipment  is  commonly  to  be  taken  as  a  selling 
deduction,  for  the  cost  of  that  packing  depends  upon  the  market 
in  which  the  salesman  has  sold.  Goods  which  go  out  to  the 
Pacific  Coast  from  the  East  require  more  expensive  packing 
than  those  delivered  in  the  next  block.  It  would  be  wrong  to 
charge  all  packing  and,  sequentially,  all  freight  outward  to  the 
goods  themselves.  The  factory  has  not  caused  the  difference  in 
costs;  the  discretion  has  been  that  of  the  salesman  and  the 
expenses  must  be  selling  items.  If,  however,  the  salesmen  have 
different  prices  for  different  sections  to  cover  the  shifting  costs 


SALES  ACCOUNTING  107 

of  packing  and  transportation,  then  these  charges  will  be  sales 
deductions,  for  the  factory  has  fixed  the  prices  to  cover  the 
added  costs. 

Uniform  prices,  regardless  of  territory,  are,  however,  quite 
usual  and  it  would  be  well  for  each  merchant  to  divide  his  selling 
expenses  so  that  he  may  see  just  how  much  it  costs  to  sell  in 
this  or  that  district.  I  have  never  seen  such  a  division  made 
by  a  national  manufacturer,  selling  from  coast  to  coast,  which 
did  not  show  that  in  some  sections  he  was  selling  merely  to  help 
his  pride  and  not  his  profit;  in  distant  markets,  the  extra  packing 
and  the  high  freight  outward  will  commonly  be  found  to  absorb 
the  entire  normal  profits. 

When  Is  Breakage  a  Selling  Expense?  Breakage  is  a  sell- 
ing expense  only  if  the  breakage  varies  with  the  distance  to  or 
with  the  kind  of  transportation  made  necessary  by  the  salesman. 
A  regular,  recurring  breakage — inevitable  in  the  class  of  goods 
sold,  is  a  sales  deduction.  If  the  breakage  or  defects  consist- 
ently appears  in  say  only  one  of  several  classes  of  articles  car- 
ried, the  price  of  that  article  should  be  raised  rather  than  the 
expense  distributed  over  all  the  lines. 

Whenever  the  traditions  of  the  trade  will  admit,  sales  should 
be  made  f.  o.  b.  the  place  of  manufacture.  This  avoids  putting 
the  calculation  of  the  freight  up  to  the  salesmen  and  conse- 
quently avoids  the  losses  which  occur  through  his  inevitable 
mistakes,  for  the  calculation  of  freight  charges  is  often  a  matter 
for  experts.  If  delivery  charges  must  be  paid,  then  a  large 
business  may  find  that  it  will  pay  to  establish  branch  depots  or 
warehouses  to  which  the  goods  may  be  sent  in  bulk  and  from 
there  distributed.  The  freight  savings  through  large  shipments 
will  usually  more  than  save  the  cost  of  the  maintenance  of  the 
storage  houses.  The  beef  packers  nearly  all  have  such  local 
warehouses  and  many  manufacturers  with  wide  markets  have 
also  adopted  the  plan.  But  the  shifting  of  the  freight  to  the 
consumer,  as  in  the  automobile  business,  is  the  most  economical 
practice.  The  maker's  profits  can  then  be  brought  down  to  an 
exact  fraction  of  the  known  costs  instead  of  also  including  an 
average  freight  charge  and  thus  the  nearby  buyer  does  not  have 
to  help  pay  the  cost  of  shipping  to  the  man  far  away. 

In  most  lines  of  trade  there  are  zones  beyond  which  it  is 
not  often  profitable  for  either  the  seller  or  the  buyer  to  trade; 
good  business  will  recognize  and  be  guided  by  this  fact.     The 


108  BUSINESS  ACCOUNTANCY 

exception  to  this  rule  is  the  marketing  of  the  high-priced  spe- 
cialty which  is  so  profitable  that  the  delivery  costs  are  negligible 
when  compared  with  the  profits. 

Selling  expenses  include  the  actual  expenses  incurred  in  the 
process  of  selling,  and  have  two  main  divisions — the  one  charge- 
able to  personal  salesmanship  and  the  other  to  the  impersonal, 
which  is  broadly  known  as  advertising. 

The  common  sales  deductions  are  returns,  allowances,  and 
trade  discount. 

Returns  represent  goods  which  are  not  accepted  by  the  buyer. 

Allowances  are  special  terms  or  compromise  settlements 
granted  to  the  purchaser  in  consideration  of  his  agreement  not 
to  return  goods  which  it  might  be  within  his  right  to  return. 

A  trade  discount  is  a  discount  which  is  given  with  the  idea 
of  stimulating  the  purchase  of  any  particular  product.  It  is 
very  different  from  a  cash  discount,  which  is  in  the  nature  of  a 
premium  paid  by  the  seller  to  the  buyer  for  the  payment  in 
cash  of  an  invoice  before  it  becomes  due  in  regular  course.  The 
trade  discount  may  be  for  quantity  purchased,  in  which  case  it 
has  some  excuse  for  being,  but  usually  it  is  but  a  cumbersome 
method  of  reducing  the  list  price  to  the  real  price  at  which  the 
seller  is  willing  to  dispose  of  his  goods;  it  is  a  survival  of  the 
days  when  trade  was  a  matter  of  haggling. 

Giving  Credits  and  Allowances.  The  average  executive 
will  insist  upon  signing  each  bank  check — although  the  actual 
checks  probably  mean  nothing  at  all  to  him;  he  will  also  scru- 
tinize all  invoices  or  at  least  their  totals,  but  the  giving  of  credit 
slips  is  commonly  relegated  to  some  clerk  or  other  subordinate 
and  receives  no  executive  attention  whatsoever.  It  is  not  com- 
monly considered  that  a  credit  memorandum  is  as  much  a  pay- 
ment of  money  as  a  bank  check  and  that  there  are  far  more 
opportunities  for  sharp  practice  in  the  credit  account  than  in 
the  bank  account.  I  have  found  a  number  of  concerns  where  a 
big  share  of  the  actually  earned  profit  was  subsequently  remitted 
in  the  form  of  irresponsibly  approved  credit  memoranda.  Every 
such  memorandum  should  be  signed  by  a  person  of  authority 
equal  with  those  who  sign  checks. 

All  sales  deductions  should  be  subject  to  keen  analysis. 
Whenever  a  credit  has  been  given,  the  slip  should  go  to  the  cost 
department,  be  entered  in  its  proper  division,  and  thus  put  into 
position  for  analysis. 


SALES  ACCOUNTING 


109 


Credit  Memorandum.  An  excellent  type  of  credit  memo- 
randum in  successful  use  is  shown  in  Forms  44  and  45.  It 
follows  the  general  idea  of  the  bank  check;  the  original  goes  to 
the  customer;  the  carbon  is  supplied  with  columns  adapted  to 
the  business  so  that  the  amounts  allowed  may  be  distributed 
at  the  time  of  writing  the  credit  to  the  proper  department. 

Form  46  is  designed  for  a  retail  house  where  the  credits  are 
frequent  and  are  given  to  the  customer  on  the  spot.  The  car- 
bons are  gathered  at  the  end  of  the  day,  distributed  to  the 
departments  and  their  total  taken  off  on  an  adding  machine 
for  cost  investigation. 

The  whole  subject  of  returns  and  credits  in  both  wholesale 
and  retail  business  is  now  receiving  the  study  which  it  should 
have  had  long  ago — before  the  present  loose  practices  became  so 
firmly  established.    It  has  not  had  previous  attention  because 


cost  systems  were  not  sufficiently  in  use  to  tell  the  owner  just 
where  he  stood  and,  besides,  the  idea  prevailed  that  every  buyer 
was  an  asset.  Customers  who  return  goods  frequently  and 
without  cause,  or  who  insist  on  many  allowances  are  not  assets, 
and  their  buying  should  be  discouraged. 

I  recall  a  jobber  who  was  much  bothered  by  the  many  re- 
turns and  petty  allowances  demanded  by  the  man  whom  he 
considered  to  be  his  best  customer  and  who  undoubtedly  did 


110  BUSINESS  ACCOUNTANCY 

buy  from  him  the  largest  gross  of  the  year.  I  made  a  careful 
analysis  of  the  account  over  several  years  and  found,  as  I  had 
suspected,  that  it  was  handled  at  a  loss.  The  jobber  would  not 
believe  the  figures  at  first;  he  insisted  that  his  judgment  could 
not  have  failed.  But  the  figures  were  right.  The  only  course 
was  to  have  a  talk  with  the  buyer  on  the  conduct  of  his  business 
and,  in  the  event  of  a  refusal  to  use  reason,  to  turn  down  the 
account  as  courteously  as  possible. 

The  buyer  had  been  thoughtless  and  wilful  rather  than  de- 
liberate in  his  actions;  when  the  matter  was  squarely  put  up 
to  him,  he  saw  not  only  the  justice  of  the  argument  but  also 
he  was  impelled  to  look  into  the  state  of  his  own  costs.  He  had 
been  freely  permitting  returns  and  passing  them  back  to  the 
jobber,  who  also  had  been  losing  money  without  knowing  it. 
Both  men  modified  their  rules,  restricted  returns,  and  turned 
the  former  losses  into  profits.  Not  a  few  of  the  large  department 
stores  who  shift  the  burden  to  the  manufacturers  have  been 
refused  as  customers  by  the  men  who  keep  accurate  costs. 


o 

N„   1 

Goods  Returned 

MILLER,  FRANKLIN. 
BASSET  &  COMPANY 

* 

Miller.  Franklin,  Bluet  &  Compiny 

f)«t» 

MILLER 

FRANKLIN, 

__ 

Form 
46 

Sales.  The  methods  for  recording  sales  will  vary  with  the 
nature  and  the  volume  of  the  business.  The  effort  should  be 
toward  simplicity;  as  the  sales  grow,  much  of  the  work  can  be 
done  by  machinery. 

In  the  old-fashioned  bookkeeping  all  of  the  invoices  were 
copied  in  detail  in  the  sales  book;  a  So  or  S10  bill  of  small  items 
would  often  fill  an  entire  page.     The  waste  was  enormous. 

The  next  development  of  the  sales  journal  was  the  inclusion 
of  additional  columns,  each  representing  a  division  or  product 
and,  as  sales  were  made,  the  amounts  were  distributed  to  the 
proper  columns,  the  total  of  the  entire  sales  being  posted  to  the 


SALES  ACCOUNTING  111 

accounts  receivable,  while  the  totals  of  the  different  divisions 
were  posted  to  separate  sales  accounts  indicating  the  volume  of 
the  sales  of  each  commodity. 

This  was  a  long  step  over  the  former  method  of  dealing  with 
sales  only  as  a  whole,  which  gave  no  opportunity  for  sales  anal- 
ysis, and  if  a  business  has  only  a  few  lines  and  the  daily  sales 
are  not  numerous,  this  method  cannot  now  be  improved  upon. 
Merely  totaling  the  columns  will  determine  the  lines  which  are 
selling  best;  with  the  provision  of  other  columns  to  enter  the 
cost  of  the  articles  sold,  a  daily  gross  profit  by  lines  can  be 
arrived  at.  Then  the  selling  expenses  and  capital  charges  can 
be  deducted  from  the  gross  and  the  net  profit  easily  ascertained. 

Such  simplicity  is  only  possible  in  the  small  business  with 
but  few  departments  or  lines  and  a  definite  cost  value  for  each 
article — normally  the  purchase  price.  All  of  the  foregoing 
entries  are  made  by  hand — the  entries  being  so  few  that  the 
hand  is  quite  as  economical  as  the  typewriter.  The  bills  also 
being  few,  they  can  be  prepared  on  a  machine  or  by  hand. 

In  the  larger  business  a  system  more  economical  of  labor 
must  be  used  if  the  best  results  are  to  be  attained. 

Machine  Bookkeeping.  I  do  not  recommend  in  any  case 
the  keeping  of  accounts  on  cards.  They  are  undoubtedly  con- 
venient in  some  respects,  but  when  used  for  accounts  receivable, 
the  danger  of  loss  is  very  great.  It  is  impossible  to  keep  them 
always  in  the  file — they  must  be  taken  out  now  and  again  and 
there  can  be  no  assurance  that  they  will  be  returned.  I  have 
found  them  jammed  up  behind  telephones  where  they  had  been 
taken  to  answer  customers'  questions,  I  have  found  them  in 
the  letter  files  attached  to  collection  letters,  in  short,  I  have 
always  found  some  of  them  missing  and  there  is  no  check  on 
earth  to  prevent  this  mislaying  every  now  and  again. 

But  even  if  this  vital  defect  could  be  overcome,  there  remains 
a  waste  of  motion  in  the  use  of  cards  which  means  dollars  in 
clerical  hire  throughout  the  course  of  a  year. 

Here  are  the  movements  in  posting  from  a  card;  first  the 
card  is  found  in  the  file,  then  it  is  taken  out  and  laid  down, 
the  entry  is  made,  and  finally  the  card  is  replaced.  In  loose- 
leaf  methods,  the  motions  incident  to  taking  the  card  from  the 
files  and  putting  it  back  again  are  saved.  The  insurance  against 
loss  and  the  saving  in  labor  make  the  looseleaf  preferable  to 
the  cards. 


112 


BUSINESS  ACCOUNTANCY 


Where  Monthly  Bills  Are  Less  Than  a  Thousand. 
The  billings  for  a  house  with  less  than  a.  thousand  bills  a 
month  can  be  cared  for  on  Forms  47  and  48.  This  is  de- 
signed for  use  on  the  typewriter  or  billing  machine,  as  are  all 
systems  for  medium  and  large  business,  and  is  founded  on  the 
principle  that  sales  must  be  analyzed  as  they  are  made — a 
cardinal  principle  of  every  phase  of  selling.  It  will  have  been 
noticed  that  all  modern  bookkeeping  works  toward  gaining  as 
many  results  as  possible  from  one  operation  of  the  clerk. 


Forms 
47-48 

In  the  form  given,  the  invoice  is  made  as  a  top  sheet;  under 
it  is  a  sales  sheet  and  the  third  copy  is  extended  with  column 
divisions  corresponding  to  the  divisions  of  the  sales  ledger. 
Thus  all  the  records  may  be  made  at  the  one  run  of  the  type- 
writer or  billing  machine.  If  the  number  of  kinds  of  articles 
sold  be  small,  additional  columns  may  be  added  for  the  cost 
prices  and  thus  the  mere  footing  of  these  two  columns  will  permit 
the  instant  ascertaining  of  the  gross  profits.  This  ready  method 
of  arriving  at  gross  can  be  best  used  by  the  concern  which  has  no 
factor  to  consider  in  the  cost  of  the  goods  other  than  the  price 
paid  for  them  plus  overhead  (which  is  not  to  be  considered  in 
gross  selling  profits)  and  is  therefore  preeminently  for  the  trading 
rather  than  the  manufacturing  concern. 

The  company  of  larger  business  volume  cannot  have  the 
simple  gross  profit  system  as  above,  for  it  would  take  far  too 
long  to  extend  the  costs.  Instead  the  costs  must  be  cared  for 
by  a  distinct  department. 


SALES  ACCOUNTING  113 

Many  ingenious  systems  have  been  devised  for  the  mechani- 
cal keeping  of  records  and  nearly  every  very  large  organization 
has  adopted  some  method  of  its  own  which  comprehends  billing 
and  adding  machines.  The  truly  up-to-date  office  will  not 
tolerate  the  waste  of  time  and  the  possibility  of  error  involved 
in  clerical  addition;  it  is  doubtful  if  any  big  business  could  keep 
its  records  were  it  not  for  mechanical  aid.  They  have  gone  far 
from  the  days  of  the  old  bookkeeper  on  the  high  stool.  It 
would  be  useless  to  attempt  to  explain  even  a  fraction  of  the 
many  splendid  systems  in  use,  for  each  is  adapted  to  the  peculiar 
needs  or  desires  of  the  business  for  which  it  was  designed. 

Simplifying  the  Making  of  Records.  The  thought  is  to 
make  as  many  other  records  as  possible  when  the  invoice  is 
being  prepared.  One  method  is  to  adopt  the  standard  form  of 
sales  book  with  plain,  numbered  loose  sheets  of  the  same  width 
as  the  invoice  and  about  20  inches  long.  The  billing  clerk  takes 
the  statement  of  the  shipping  clerk  and  from  it  writes  the  invoice, 
the  carbon  copy  of  the  invoice  goes  through  to  the  sales  book 
sheet  and  also  to  whatever  number  of  other  sheets  required  for 
the  distribution  or  the  cost  department  or  other  records. 

The  final  sheet  is  a  proof  sheet  while  the  others  have  such 
rulings,  printed  matter  or  markings  as  may  be  desired;  in  some 
cases  the  bill  of  lading  and  duplicate  is  even  written  at  the  same 
operation  as  the  invoice.  The  invoice  or  a  carbon  sheet  is 
turned  over  to  another  clerk  who  posts  the  totals  to  the  individual 
ledger  account  by  another  carbon  system;  the  original  is  the 
statement  to  be  sent  to  the  customer  at  the  end  of  the  month 
and  the  copy  on  the  ledger  page  constitutes  the  accounts  re- 
ceivable ledger.  At  the  end  of  the  month  the  statement  is 
ready  to  be  taken  out  from  the  book  or  file  and  mailed  to  the 
customer  without  further  labor. 

There  are  numerous  accuracy  checks;  first  the  detailed 
invoices  are  taken  off  on  the  adding  machine;  the  billing  clerk's 
machine  has  an  automatic  device  for  keeping  the  day's  total 
and  the  ledger  clerk  also  has  the  totals  of  what  he  has  posted. 
These  three  totals  must  agree.  If  mechanical  devices  have 
been  used,  there  is  no  possibility  of  error  unless  the  shipping 
clerk  has  sent  up  an  incorrect  statement. 

Here  is  another  plan  which  is  used  by  a  large  company 
which  keeps  a  stock  on  hand  sufficient  to  fill  each  order  as  it 
comes  in  from  the  salesman.     Everything  is  done  in  the  one 


114 


BUSINESS  ACCOUNTANCY 


operation.  There  are  a  number  of  copies.  The  salesman's 
order  is  taken  as  the  guide.  From  it  is  written  the  invoice. 
The  first  copy  goes  to  the  office  as  a  sales  sheet,  the  second  to 
the  stock  room  as  a  requisition  to  send  the  goods  to  the  shipping 
clerk,  and  the  third  copy  goes  to  the  shipping  clerk  and  acts  as 
a  reminder  if  the  goods  do  not  arrive  from  the  stock  room. 

The  shipping  clerk  also  has  another  copy  which  is  on  a  bill 
of  lading  and  is  furnished  to  the  railroad,  and  still  another  copy 
which  he  packs  with  the  goods  in  an  envelop  marked  "memo, 
of  contents "  for  the  use  of  the  purchaser.  When  he  sends  out 
the  shipment  he  returns  one  of  his  copies  to  the  office  which 
thereby  knows  that  the  invoice  may  be  mailed.  If  a  shipment 
is  incomplete  a  new  bill  of  lading  is  made  out  and  a  note  is 
made  on  the  invoice  and  the  other  copies  of  the  shortage;  of 
course,  unless  the  great  percentage  of  the  shipments  are  cor- 
rect, this  system  will  not  be  economical,  for  the  correction  of 
the  many  copies  is  a  laborious  task. 


o 

Pann 

Sales  Book 

Dr.  Accts. 

Rec. 

LF. 

Credit  Sales 
Reading 

Credit  Sales 
Packerack 

Credit  Sales 
Tulpahocken 

Credit 
Sundry 

Form  49 

Where  a  concern  has  branches  the  system  shown  in  Form  49 
may  be  used;  in  view  of  the  preceding  explanations,  it  need  not 
be  further  detailed. 

Cash  Sales.  The  recording  of  cash  sales  is  of  vital  impor- 
tance because  of  the  ample  opportunity  for  fraud.  This  matter 
will  be  taken  up  in  the  succeeding  chapter,  and  it  is  only  neces- 
sary to  say  here  that  the  best  possible  safeguard  is  a  cash  register, 
which  makes  a  check  on  the  cash  and  also  helps  to  keep  a  record 
of  the  stock  on  hand.  Every  sale  when  registered  on  the  machine 
checks  up  merchandise  as  having  gone  out  against  the  cash 
as  having  come  in. 

Selling  Expenses.  The  accounting  procedure  in  recording 
the  expense  involved  in  sales  is  very  simple  when  related  to 


SALES  ACCOUNTING  115 

the  jobber.  The  companies  which  manufacture  and  sell  to 
jobbers  only,  do  not  bother  to  record  the  commission  or  discount 
given  to  the  jobber,  but  carry  their  sales  at  the  net  price  which 
they  are  to  receive.  They  record,  however,  cash  discounts  when 
they  allow  them  for  prompt  payment. 

With  the  selling  agent  this  procedure  differs  according  to 
terms  of  the  contract  with  the  selling  agent.  The  commissions 
and  other  expenses  which  have  been  incurred  are  deducted  and 
the  balance  is  charged  to  the  selling  agent.  This  applies  where 
the  selling  agent  makes  his  own  collections  and  remits  directly. 
Where  the  sales  as  made  are  turned  over  to  the  home  company, 
the  debits  are  to  accounts  receivable  with  the  corresponding 
credit  to  sales  in  the  full  amount.  The  accounts  involved  are 
sales  returned,  sales  allowances,  freight  outward,  and  the  like . 

The  accounting  end  of  the  commission  man's  business  is 
quite  similar  to  that  of  the  jobber.  Many  houses  do  not  con- 
sider the  commissions  and  other  expenses  paid  by  the  com- 
mission man  and  which  he  deducts  before  paying  the  consignor. 
In  that  way  they  treat  only  the  net  or  the  abstract  and  save  a 
considerable  amount  of  time  and  labor.  Other  houses  take  all 
of  these  items  into  consideration  with  the  idea  of  getting  up 
certain  statistics  to  use  as  a  basis  for  future  business. 

There  is  quite  an  elaboration  of  accounts  where  the  company 
conducts  and  maintains  its  own  selling  organization.  For  in- 
stance, there  are  the  salaries  of  salesmen,  expenses  of  salesmen, 
commissions,  advertising,  selling  office  expense,  and  so  forth. 

Salesmen's  Expenses.  The  handling  of  salesmen,  with  their 
reports,  their  commissions  and  their  expenses  is  apt  to  be  most 
disagreeable.  The  better  the  salesman,  the  less  amenable  is 
he  to  rules  or  regulations.  The  pluggers  will  obey  all  the  rules 
but  they  will  not  sell  goods. 

The  important  matter  in  dealing  with  salesmen  is  to  know 
whether  the  man  or  the  territory  is  responsible  for  the  sales 
and  also  to  know  whether  or  not  the  sales  which  are  being 
made  are  of  the  goods  which  the  company  most  desires  to  sell. 

Various  kinds  of  salesmen's  reports  have  been  devised; 
the  best  are  those  which  give  the  salesman  nothing  more  than 
a  mere  scribbling  to  complete  the  record.  Let  cards  be  given 
to  him  containing  the  names  of  the  people  whom  he  is  to  see 
and  all  the  needed  data;  on  this  he  can  record  the  simple  state- 
ment of  the  result  of  his  visit — a  turndown,  a  failure  to  see,  or 


116  BUSINESS  ACCOUNTANCY 

an  order,  and  mail  it  back  to  the  office.  The  office  should  attend 
to  all  other  clerical  work.  Consider  the  salesman  as  through 
when  he  has  seen  the  prospect. 

In  corresponding  with  salesmen,  a  considerable  saving  is 
effected  in  time  and  expense  by  the  use  of  a  form  such  as  is 
shown  as  Form  50.  It  renders  regular  letters  unnecessary  and 
saves  time  both  for  the  employer  and  the  salesman. 

The  ordinary  method  of  treating  the  traveling  and  other 
road  expenses  of  salesmen  is  unsatisfactory.  It  is  unfair  to  fix 
an  arbitrary  limit,  regardless  of  conditions,  if  it  is  expected  that 
the  man  will  charge  his  actual  expenses  if  they  are  less  than  the 
fixed  limit,  but  pay  them  out  of  his  own  pocket  if  they  exceed 
the  limit.  If  there  are  no  standards,  the  expense  account  is  a 
subject  ol  endless  debate  in  bitter  mood.  The  best  plan  is  to 
standardize  expenses  according  to  a  comfortable  rate  determined 
by  the  population  of  the  town  visited  and  to  credit  the  man 
with  the  amount  allowed  under  the  rates,  regardless  of  what  he 
may  actually  spend.  Thus  he  will  make  money  on  some  trips 
and  lose  on  others,  but  in  the  end  both  the  company  and  the 
man  will  come  out  about  square  and  all  discussion  of  expense 
accounts  can  be  avoided. 

Form  51  is  used  where  the  time  of  the  men  is  to  be  distributed 
as  in  the  case  of  professional  services.  General  salesmen's  time 
need  not  be  so  distributed  unless  they  carry  several  lines  and  it  is 
desired  to  know  what  proportion  of  time  is  spent  on  each  line. 
The  form  given  is  basic  and  will  of  course  be  modified  to  suit 
conditions.  The  advantage  of  standardization  is  self-evident. 
The  reverse  of  the  report  fully  explains  its  workings,  and  reads 
as  follows: 

Expense  schedules  are  to  be  rendered  for  the  periods  from  1st  to  8th  inclusive, 
9th  to  16th  inclusive,  17th  to  24th  inclusive,  and  25th  to  and  including  the  last 
day  of  the  month. 

Railway  fare  will  be  allowed  at  exactly  one-way  rates.  An  individual  may 
buy  mileage  or  round  trip  tickets  and  make  a  profit  for  the  individual,  but  he 
must  assume  the  risk  of  loss  of  same  or  not  having  appointments  to  use  return 
tickets  or  mileage. 

No  telephone  or  telegrams  to  New  York  office  to  be  charged  from  points 
where  the  charge  can  be  reversed.  Under  no  circumstances  should  any  expense 
be  incurred  for  either  telephone  or  telegrams,  where  the  subject  is  personal. 

Sleeping  car  berths  are  chargeable  at  lower  berth  rates,  regardless  of  whether 
lower  or  upper  is  occupied.    This  in  order  to  avoid  any  question  on  this  point. 

Parlor  car  seats  may  be  charged  when  the  distance  traveled  without  change 
of  cars  is  in  excess  of  99  miles. 


SALES  ACCOUNTING  117 

The  living  expenses,  including  meals,  room,  tips  with  meals,  and  so  on,  will 
be  charged  for  as  follows : 

In  towns  up  to  7,500  $2.50  a  day 

In  towns  from  7,500  to  15,000  3.00  a  day 
In  towns  from  15,000  to  30,000  3.50  a  day 
In  towns  from  30,000  to  50,000  4.00  a  day 
In  towns  from  50,000  to  100,000  4.50  a  day 
In  towns  from  100,000  to  250,000  5.00  a  day 
In  towns  over   250,000  5.50  a  day 

The  population  of  a  town  or  city  is  to  be  determined  by  the  figures  given 
in  the  latest  issue  of  Travelers  Railway  Guide. 

The  town  in  which  the  client's  place  of  business  is  actually  located,  is  the 
one  considered  in  this  schedule.  As  an  instance,  a  client  located  in  Cambridge, 
Mass.,  would  be  subjected  to  a  cost  of  $5  a  day,  though  the  staff  member 
might  choose  to  reside  in  Boston,  the  adjacent  city.  The  distinction  between 
a  separate  city  and  a  suburb  of  the  same  city,  is  determined  by  the  existence 
of  a  separate  city,  town,  or  village  government.  An  exception  is  made  when  the 
town  or  city  in  which  the  client  is  located  is  without  suitable  hotel  accommo- 
dation, in  which  event  the  rate  of  the  nearest  town  or  city  having  such  accom- 
modation, will  be  charged. 

All  travel  to  and  from  a  client's  place  of  business  when  outside  of  the  New 
York  Metropolitan  district  will  be  at  class  A  rate. 

For  charging  purposes  a  day  will  be  divided  into  tenths,  breakfast  being 
chargeable  at  two  tenths,  lunch  one  tenth,  dinner  three  tenths  and  room  four 
tenths  of  the  day's  allowance.  Such  expenses  are  charged  by  checking  the 
squares  on  the  reverse  side  of  this  sheet,  ten  squares  being  allotted  to  each  day 
under  each  class. 

Upon  work  done  in  towns  close  to  New  York  City  and  in  what  is  known  by 
us  as  the  New  York  metropolitan  district,  only  traveling  expenses  are  charged. 

The  New  York  metropolitan  district,  from  our  standpoint,  includes  such 
cities,  towns,  and  villages  surrounding  New  York  as  can  be  reached  at  9:30 
a.  m.  by  leaving  some  railroad  terminal  or  ferry  in  New  York  City  not  earlier 
than  8  a.  m. 

No  expense  of  any  other  member  of  a  staff's  family  is  chargeable  under 
any  circumstances. 

The  rule  for  men  going  to  a  new  place  to  begin  continuous  service,  is  that 
they  may  charge  their  expenses  through  the  following  Monday  at  the  schedule 
rate  of  the  city,  town,  or  village  they  are  in,  and  thereafter  they  will  be  allowed 
the  sum  of  $1.75  a  day.  Any  service  that  it  is  known  beforehand  will  require 
three  weeks  or  more  of  uninterrupted  service  in  one  city,  town,  or  village,  is 
considered  a  continuous  engagement. 

No  moving  expense  or  charges  on  trunks  or  personal  belongings  are  to  be 
charged  to  the  company,  unless  a  staff  member  is  going  on  a  "continuous" 
engagement,  in  which  event  baggage  transfer  charges  and  railroad  excess  bag- 
gage charges  will  be  allowed  on  300  pounds  of  baggage. 

Excepting  when  working  in  New  York  City  or  Brooklyn,  car  fare  may  be 
charged  from  hotel  or  boarding  house  to  client's  place  of  business,  when  the 
use  of  a  car  is  necessary. 


US  BUSINESS  ACCOUNTANCY 

Tips:  For  extraordinary  expenses,  such  as  tips,  checking  baggage,  and 
so  on,  an  allowance  of  50  cents  will  be  made  per  day  for  the  first  whole  or 
part  of  a  day  in  any  one  place.  No  charge  will  be  allowed  after  the  first  con- 
tinuous day  in  one  place. 

Excess  fare  trains  may  be  used  only  when  it  is  thereby  possible  to  save  time 
between  8  a.  m.  and  6  p.  m.  for  the  client,  this  company,  or  the  staff  member. 

The  above  schedule  is  based  upon  the  belief  that  some  members,  economically 
inclined,  will  make  a  profit  on  this  schedule,  and  others,  more  liberally  inclined, 
will  incur  a  loss.  This  individual  difference  should  not  concern  the  company. 
Hitherto  the  liberal  men  have  cost  the  company  more,  and  the  economical  men 
less,  without  either  of  these  qualities  being  put  into  the  balance  of  weighing 
the  value  of  the  individual,  and  this  works  an  injustice  to  the  economical  men. 

This  is  to  apply  to  everyone  in  the  company's  employ,  including  executives, 
and  is  not  designed  to  make  any  money  for  the  company,  but  rather,  if  the 
average  of  the  past  be  considered,  to  give  the  staff  members  a  little  gain.  The 
company,  however,  gains  the  advantage  of  decreased  clerical  labor,  avoiding 
the  disagreeable  task  of  criticising  expense,  eliminating  all  question  of  honesty, 
and  being  able  to  give  a  client  a  definite  estimate  of  expense. 

For  the  duration  of  the  war,  15%  may  be  added  to  the  expenses  desig- 
nated as  units  A  to  H  inclusive,  on  all  contracts  with  new  clients.  Show  the 
additional  amount  in  the  space  under  H  on  the  recapitulation  in  the  lower 
left-hand  corner. 

Salesmen's  Commissions.  The  best  method  of  determin- 
ing commissions  is  through  their  relation  to  the  profits  made 
on  the  lines  sold.  A  flat  commission  is  never  satisfactory  to 
the  employer  and  it  wall  usually  result  in  the  pushing  by  the 
salesman  of  the  easy  selling  leaders  on  which  the  profit  is  small. 

But  to  fix  commissions  on  profits,  detailed  costs  are  necessary, 
and  the  basis  of  all  commissions  should  be  a  sheet  of  operations 
as  in  Form  52,  shown  on  Insert  III. 

The  company  for  which  this  sheet  was  made  had  thought 
that  the  real  money  makers  were  far  different  from  those  which 
the  exact  figures  disclosed.  It  was  found  that  some  of  the  sup- 
posedly good  salesmen  were  selling  only  the  least  profitable 
lines,  while  some  of  those  salesmen  who  were  not  so  highly  held 
were  really  making  more  money  for  the  company  than  were  the 
reputed  stars.  The  manner  of  making  up  this  sheet  will  be  more 
fully  taken  up  under  the  cost  sections  of  this  book,  but  the  report 
is  here  shown  as  the  kind  of  a  report  which  should  be  used  to 
make  up  commission  rates.  The  low  profit  lines,  if  they  are  not 
cut  out  entirely,  will  carry  little  inducement  for  the  salesman 
to  push  them,  while  the  high  profit  items  will  have  a  high  com- 
mission which  will  spur  the  road  men  on  to  increased  sales. 
Salesmen  will  see  the  point  of  the  sliding  scale  and  fall  in  with  it. 


INSERT  III 

FORM  52,  described  on  page  118 


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Staff  Correspondence 

Miller,  Franklin,  Basset  and  Company 
New  York  City 


No, 


We  trust  no  offense  will  bo  taken  at  the 
omission  of  the  salutation  and  format 
closing  from  this  letter,  as  no  offense  Is 
intended. In  becoming  a  custom,  both 
salutation  and  closing  have  lost  signifi- 
cance and  when  omitted,  together  with 
addressee's  address  and  company's  sig- 
nature, (the  sender  being  identified  by 
the  letterhead)  a  considerable  saving  per 
year  In  stenographic  labor  results. 


To  Mr.  Send  your  answer  to  the  above  letter,  upon  the  blank  space  provided  below.    If  the  space  is 

-_  Insufficient,  use  this  sheet  as  the  first  page  of  your  letter.    If  no  answer  is  to  be  sent,  return 

No.     1399  the  blank  sheet  so  that  we  may  know  you  received  our  communication.  —  M.  F.  B.  &  Co. 

Date 


FORM  50:  In  corresponding  with  salesmen, 
a  saving  is  effected  in  time  and  expense  by 
the  use  of  a  form  such  as  shown  here.  It 
renders  regular  letters  unnecessary  and  saves 
time  both  for  the  employer  and  the  salesman. 


119 


o 

EXPENSE  AND  TIME  REPORT 


o o_ 

MILLER,  FRANKLIN,  BASSET  AND  COMPANY 


FORM  51:  This  form  is  ef- 
fectively used  by  many  con- 
cerns where  the  time  of  the  men 
is  to  be  distributed,  as  in  the 
case  of  professional  men.  The 
form  given  is  basic  and  should,  of 
course,  be  modified  to  suit  con- 
ditions. The  advantages  of 
standardization  is  self-evident. 
Many  concerns  are  now  using 
this  or  a  similar  form  with 
success.  Complete  instructions 
for  using  this  form  are  repro- 
duced on  pages   116,   117,   118. 


Total 


Expense  Summary 


Total 


Check  No- 


r     .      _  Z      '»    1     9   17  2l" 

Explaiuttons  of  Re-    g;  }  '10  \£  — 


quests  re  Disposition 

of  Checks: 


HXID52ZI 


4122028 


I    6' 14  2230 


■c.  7|l5'i3'3T 


s,  a  ;i6.24 

5 total 


Rats 


120 


SALES  ACCOUNTING 


121 


The  whole  subject  of  marketing  from  the  cost  and  accounting 
side  is  divided  into  two  great  divisions:  (1)  properly  to  charge 
the  buyer  with  what  he  has  bought,  and  (2)  to  find  out  in  detail 
the  profits,  which  means  a  detailed  investigation  of  expenses 
and  costs.    The  latter  will  be  taken  up  under  expense  analysis. 

THE  SPECIALTY  COMPANY 

The  recording  of  sales  is  so  simple  and  it  may  be  accom- 
plished in  so  many  diverse  fashions  that  they  will  not  be  here 
recorded  on  any  of  the  various  forms.  The  items  sold  would 
be  credited  to  sales  and  debited  to  accounts  receivable.  A 
number  of  other  business  transactions  have  also  been  included 
to  round  out  the  progress  of  the  enterprise.  These  are  all  en- 
tered to  the  proper  ledger  accounts  and  finally  a  trial  balance 
is  taken  off. 

The  following  sales  were  made,  as  recorded  in  the  sales  ledger: 

David  Jacobs $1,550.00 

Frank  Cappell 210.00 

Edward  Mann 1,075.00 

Martin  Hall 662.50 

Joseph  Odell 170.00  $3,667.50 

Payroll  for  the  month $1,665.00 

Purchases  for  the  month: 

Raw  materials $1,235.50 

Expense 239.00  1,474.50 

Payments  made  on  accounts  payable 2,060.70 

Cash  discount  on  purchases 42.05 

Interest  accrued 41 .67 

As  a  result,  the  appearance  of  the  ledger  accounts  is  as 
shown  in  Forms  S61  to  S75  inclusive.  The  resultant  trial 
balance,  as  of  May  31,  is  shown  in  Form  S76. 


(Ledger)                                 Capital  Stock  Unissued 

Sate 

I  tents 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

May 

1 

Balance 

69 

100 

00 

Form 

S- 

n\     ■ 

122 


BUSINESS  ACCOUNTANCY 


(Ledger) 


Furniture  and  Fixtures 


Date 


Items 


.Pol. 


Debit   II   Date   I        Items 


Pol. 


Credit 


May 


Balance 


Form  S-62 


900  0 


(Ledger) 


Buildings  and  Equipment 


Date 


Items 


Pol. 


Debit  |  Date  U   Items 


Fol. 


Credit 


May 


Balance 


Form  S-63\\_ 


18  50C  00 


(Ledger)         Capital  Stock  Authorized 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

May 

1 

Balance 

IOC 

000 

00 

Forn 

l  S 

.64  1 

(Ledger) 

Bond  and  Mortgage 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

May 

1 

Balance 

10 

OOC 

00 

Form  S 

-655 

(Ledger)            Cash  on  Hand 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol.J 

Credit 

May 

June 

1 
1 

Balance 
Balance 

4 

578 

04 

May 

■ 

ii 

31 
31 

31 

Payroll 
Account6 
Payable 
Balance 

1 

2 

665 

060 
852 

00 

70 
3* 

4 

578 

04 

4 

578 

04 

852 

3* 

Forn 

:S 

!fi7) 

SALES  ACCOUNTING 


123 


(Ledger)                           Accounts  Payable 

Date 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

May 

y 

31 
31 

Cash  Book 
Balance 

2 
2 

102 
539 

75 
50 

May 

■ 

June 

1 

31 

1 

Balance 
Charge 
Reg»r. 

Balance 

3 

1 

167 

474 

75 
50 

4 

642 

25 

4 

642 

25 

2 

539 

50 

Form 

S- 

67   t -J 

(Ledger)                                   Interest  Accrued 

Date 

Items 

Fol. 

Debit 

Date 

I  tela 3 

Fol. 

Credit 

May 

31 

Mortgage 
Payable 

41 

67 

Form 

s-e 

i«    \      ., 

(Ledger) 

Accounts  Receivable 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

May 

31 

Sales 

3 

667 

50 

Form 

S-( 

5^ 

J 

(Ledger) 


Materials  and  Supplies 


Date 


Items 


Debit 


Date 


Items 


Fol. 


Credit 


May 


Balance 
Charge  Reg»rJ 


Form  S-70 


") 


117 
235 


352  90 


1 


124 


BUSINESS  ACCOUNTANCY 


(Ledger) 


Payroll 




Credit 


Date 


Items 


Fol. 


Debit 


Date 


Items       fl  Fol. 


May 


Balance 
Cash 


Form  S-71 


588 


053 


50 


65  oo 


50 


UL1 


(Ledger) 


Expense 


Date 


Items 


Fol 


Debit 


Date    H       Items      a  Fol 


Credit 


May 


Balance 
Charge  Reg'r 


Form  S-72 


"L 


584 
239 


823 


85 


(Ledger)                                        Interest 

Date 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

May 

1 
31 

Balance 
Mortgage 
Payable 

425 
41 

00 

67 

Form 

S- 

73  1 ■ J 

(Ledger) 

Sales 

Date 

I  terns 

Fol. 

Debit 

Date  1     Items 

FoL 

Credit 

May 

3J 

J 

_ 

3 

667 

50 

Form 

S- 

74   1 

(Ledger) 


Cash     Discount 


Late 


Items 


Fol. 


Debit 


Date 


Items 


Fol 


Credit 


Form  S-75 


iS-75    I 


I L 


May 


31 


Balance 
on  Pur- 
chases 

On  Pur- 
chases 


26 


04 


42  05 


SALES  ACCOUNTING  125 

The  trial  balance,  as  of  May  31,  is  as  shown  in  Form  S76. 


Trial  Balance 

Bate?  May  11,  lQlfi 

Debit 

Credit 

Capital  Stock  Unissued 

69 

700 

00 

Capital  Stock  Authorized 

100 

000 

00 

Buildings  and  Equipment 

18 

500 

00 

Bond  and  Mortgage 

10 

000 

00 

Furniture  and  Fixtures 

900 

00 

Accounts  Payable 

2 

5^9 

50 

Cash  on  Hand 

852 

^4 

Interest  Accrued 

41 

67 

Accounts  Receivable 

1 

667 

50 

Sales 

3 

667 

50 

Materials  and  Supplies 

11 

^52 

90 

Cash  Discount 

68 

09 

Payroll 

7 

051 

50 

Expense 

1 

82^ 

85 

Interest 

466 

67 

Totals 

116 

3l6j 

76 

n6 

316 

76 

— " — ^)     Totals 

Form  S-76  < — — ' 

CHAPTER  Vm 

HANDLING  THE  CASH 

MONEY  will  be  received  in  the  ordinary  course  of  business 
in  cash,  or  in  bank  or  other  checks,  and  it  will  be  received 
for  one  of  the  five  following  reasons : 

1.  For  accounts  receivable. 

2.  For  notes  receivable,  which  include,  as  a  subdivision,  the 
notes  receivable  which  have  been  discounted  and  the  notes 
receivable  which  have  not  been  discounted. 

3.  Trade  acceptances,  divided  into  domestic  and  foreign. 

4.  Cash  sales. 

5.  Miscellaneous  income. 

The  handling  of  each  of  these  items  and  the  importance  of 
each  will  vary  with  the  size  and  nature  of  the  business.  For 
instance,  a  commission  house  will  have  very  few  cash  sales, 
while  the  department  store  will  have  a  vast  majority  of  cash 
sales.  There  is  the  concern  which  devotes  itself  exclusively 
to  cash  transactions,  as  most  chain-store  organizations.  There  is 
again  the  large  jobbing  house  in  which  notes  and  bills  receivable 
will  play  an  important  part,  and  the  importing  firm  where  trade 
acceptances  will  probably  preponderate. 

Of  all  these  divisions  the  trade  acceptance  is  the  only  one 
which  is  new  to  American  business.  The  foreign  trade  acceptance 
is  familiar  to  importers,  but  only  since  the  passage  of  the  Federal 
Reserve  Act  have  domestic  trade  acceptances  been  used  to  any 
extent  in  this  country.  The  method  of  their  accounting  is  not 
yet  entirely  settled. 

Trade  Acceptances.  The  following  excellent  discussion  of 
accounting  procedure  for  trade  acceptances  is  given  by  Pro- 
fessor E.  A.  Saliers,  assistant  professor  of  accounting  of  the  Shef- 
field Scientific  School  of  Yale  University,  in  the  Bulletin  of  the 
National  Association  of  Credit  Men  for  June,  1917. 

126 


HANDLING  THE  CASH  127 

In  answer  to  questions  submitted  to  125  companies,  firms,  and  propri- 
etorships located  in  different  parts  of  the  country,  regarding  the  accounting 
procedure  necessary  to  record  the  receipt,  discount,  and  so  on,  of  the  trade 
acceptance,  a  large  number  of  carefully  worded  replies  were  received.  These 
have  been  tabulated  and  compared,  and  it  is  the  purpose  of  this  brief  article  to 
summarize  the  results  and  draw  such  conclusions  as  may  be  warranted. 

The  first  query  was,  whether  or  not  it  is  desirable  to  make  a  distinction 
between  acceptances  and  ordinary  notes,  for  accounting  purposes.  As  was  to 
be  expected  from  the  present  status  of  the  trade  acceptance,  many  concerns 
replied  indefinitely  to  this  as  well  as  other  questions,  while  some,  having  had  no 
trade  acceptance  experience  whatever,  did  not  answer.  Of  those  replying 
definitely  there  was  about  an  equal  division — one  half  favoring  the  use  of  a 
separate  account  for  acceptances  and  the  other  half 'making  no  distinction  be- 
tween notes  and  acceptances. 

Although  it  might  appear  from  this  that  neither  method  is  favored  above 
the  other,  the  writer  is  of  the  belief  that  the  plan  of  making  a  clear-cut  dis- 
tinction between  notes  and  acceptances  is  favored  by  those  who  have  had 
sufficient  experience  to  give  weight  to  their  opinions.  There  is  an  essential 
difference  between  notes  and  acceptances,  which  arises  out  of  their  origin  and 
the  character  of  the  security  behind  them.  Notes  are  usually  single-name 
paper  and  their  discount  rate  is  higher  than  is  that  of  acceptance.  Clearly,  as 
the  trade  acceptance  is  more  widely  adopted,  it  will  be  given  a  distinctive  and 
separate  account  in  the  general  ledger  and  it  will  appear  under  its  proper  title 
m  the  balance  sheet. 

Assuming  that  a  separate  account  will  be  kept  for  acceptances,  the  experi- 
ence of  the  concerns  questioned  leads  to  the  conclusion  that  when  an  acceptance 
is  returned  to  the  maker  properly  filled  out  and  signed  by  the  acceptor,  the 
proper  entry  is  a  charge  to  acceptances  account  and  a  credit  to  the  customer. 
In  the  books  of  the  buyer,  the  personal  account  of  the  seller  (credited  when 
purchase  is  made)  is  charged  and  "acceptances"  (or  "acceptances  payable")  is 
credited. 

To  this  practice  there  were  noted  some  marked  exceptions.  One  company 
enters  its  acceptances  in  a  bills  receivable  book,  the  same  as  notes,  but  with  a 
distinguishing  title.  Another  company  does  not  enter  the  acceptance  until  it 
is  passed  through  the  cash  book  for  collection.  Still  another  handles  accep- 
tances as  current  cash  items.  Another  makes  a  memorandum  on  the  face  of 
the  open  account.  These  methods  possess  relative  degrees  of  demerit.  As 
long  as  the  number  of  acceptances  is  small  there  can  be  no  serious  objection 
to  entering  them  in  the  notes  receivable  book.  But  it  is  certainly  wrong  to 
consider  acceptances  on  hand  but  not  discounted  as  current  cash  items;  nor  is 
it  sufficient  merely  to  make  a  memorandum  on  the  face  of  the  personal  account . 

One  progressive  company  keeps  a  trade  acceptance  register  in  which  the 
acceptances  are  entered  according  to  serial  number,  name,  address  of  cus- 
tomer, date  of  draft,  its  time  and  amount.  From  this  trade  acceptance  register, 
postings  are  made  direct  to  the  customer's  ledger  accounts.  After  being  thus 
posted,  the  acceptances  are  filed  in  a  due  date  tickler  according  to  time  of 
maturity  to  facilitate  their  discount  or  collection.  The  trade  acceptance 
register  is  controlled  by  a  trade  acceptance  controlling  account  in  the  general 
ledger.    This  controlling  account  is  charged  at  the  end  of  each  month  with  the 


128  BUSINESS  ACCOUNTANCY 

total  of  acceptances  received  during  the  month,  and  credited  with  the  total 
of  acceptances  discounted  or  collected.  A  separate  discount  is  not  kept  for 
acceptances. 

Acceptances  may  be  held  for  collection  at  maturity  or  they  may  be  dis- 
counted. Here  again  the  practice  followed  by  different  concerns  varies.  Some 
charge  the  bank  and  credit  acceptances,  apparently  neglecting  to  show  the 
contingent  liability  which  exists  upon  the  discounted  acceptance  previous  to 
the  date  of  maturity.  Here,  too,  some  make  no  distinction  between  notes  and 
acceptances.  Some  close  the  acceptance  account  and  open  a  discounted 
acceptance  account.  Probably  the  best  procedure  is  to  retain  the  charge  in  the 
acceptance  account  as  an  asset  and  credit  an  account  known  as  acceptances 
discounted,  at  the  same  time  charging  cash  with  the  proceeds  and  interest,  or 
discount  with  the  discount.  If  the  acceptance  is  paid  at  maturity,  as  it  ordi- 
narily will  be,  the  acceptances  discounted  account  should  then  be  charged  and 
acceptances  account  credited  with  the  amount  of  the  acceptance.  This  is 
essentially  the  same  procedure  as  that  recommended  for  notes  receivable  dis- 
counted, the  difference  being  merely  those  of  terminology.  However,  the 
contingent  liability  on  discounted  acceptances  is  of  a  different  character  from 
that  on  ordinary  discounted  notes  receivable,  and  should  be  shown  separately. 

Conclusion:  There  is  nothing  in  the  nature  of  the  trade  acceptance  to 
necessitate  any  radical  changes  from  the  correct  accounting  practice  already 
in  vogue  for  handling  notes  and  bills.  Nevertheless  attention  ought  to  be 
directed  particularly  to  the  distinction  between  notes  and  acceptances  arising 
out  of  their  relative  security  and  convertibility  into  cash.  Acceptances  differ 
widely  from  notes.  They  originate  for  a  different  purpose  in  most  instances 
and  they  are  a  far  more  liquid  asset.  Consequently  they  should  be  shown 
separately  in  the  balance  sheet.  On  an  average,  the  contingent  liability  upon 
discounted  acceptances  is  not  as  great  as  that  on  discounted  notes,  due  to  the 
fact  that  the  acceptance  arises  out  of  an  actual  transaction  and  represents  a 
normal  business  procedure,  while  notes  are  oftentimes  the  direct  outgrowth  of 
failure  to  pay  open  accounts  promptly,  or  are  for  accommodation  and  without 
any  well-defined  status.  These  considerations  justify  making  a  careful  dis- 
tinction between  notes  and  acceptances  with  the  possible  exception  of  those 
instances  where  one  or  the  other,  or  both,  are  comparatively  insignificant. 

Trade  acceptances,  therefore,  may  be  treated  in  exactly 
the  same  manner  as  bills  receivable  or  bills  payable,  with  their 
discount  provisions,  except  that  in  addition  to  the  heading 
"bills"  or  "notes"  should  be  "trade  acceptances."  No  further 
treatment  of  trade  acceptances  will  be  given  in  this  chapter  for 
all  that  might  be  said  of  their  accounting  is  said  under  the 
discussion  of  bills  and  notes. 

Collections.  Most  of  the  features  of  that  division  of  the 
business  which  is  known  as  the  "collection  department"  are 
more  properly  of  credit  than  of  accounting,  since  the  billing 
of  the  debtor  has  been  discussed  in  a  previous  chapter,  but  it 
may  not  be  amiss  to  look  at  the  subject  from  the  point  of  profit 


HANDLING  THE  CASH  129 

with  the  thought  that  a  sale  is  really  of  little  moment  until  it 
becomes  a  cash  entry. 

Not  a  few  executives  and  nearly  all  sales  managers  and  sales- 
men feel  that  the  cycle  of  business  has  been  completed  once  the 
order  has  been  taken  and  the  goods  made  up  and  delivered,  and 
they  are  inclined  to  neglect  the  accounts  receivable  until  their 
consideration  becomes  inescapable.  These  pertinent  questions 
may  well  be  self -put  by  almost  any  executive  or  owner: 

Do  you  approve  each  one  of  all  the  allowances  made  upon 
returned  goods? 

Do  you  make  a  detailed  list  of  outstanding  balances? 

Do  you  delegate  the  work  of  writing  collection  letters  to  a 
clerk — generally  already  overworked  upon  other  tasks? 

Do  you  look  into  the  amount  of  credit  allowed  a  customer — 
before  the  account  is  proven  "shaky" — or  do  you  allow  the  sales 
department  representatives — to  whom  the  making  of  a  sale  is 
all-important — to  determine  this  vital  detail? 

Where  the  number  of  accounts  outstanding  is  in  excess  of 
500,  it  has  been  found  advisable  to  detail  the  work  of  following 
up  to  a  competent  stenographer,  who,  under  the  supervision 
of  one  of  the  principals,  will  give  all  of  the  attention  needed. 

By  prompt  action  in  going  after  accounts  when  they  are 
due,  it  is  often  possible  to  collect,  before  more  aggressive  credi- 
tors secure  the  available  funds;  or  to  determine  the  value  of  the 
debtor  as  a  customer  before  the  generally  energetic  sales  depart- 
ment succeeds  in  passing  more  orders  for  shipment. 

Competent  executive  consideration  should  always  be  given 
to  the  matter  of  goods  returned ;  the  return  of  a  shipment  means 
second-hand  goods  in  stock,  besides  freight  and  handling  charges 
both  ways.  This  is  particularly  true  of  specials  which  must 
often  be  "scrapped"  or  "jobbed."  An  allowance,  when  made, 
has  the  same  effect  upon  profits  as  a  cash  disbursement.  Yet 
the  average  executive  who  carefully  scrutinizes  a  check  will 
allow  any  clerk  to  authorize  allowances. 

Worthless  and  Disputed  Accounts.  The  attention  of 
executives  is  directed,  not  only  to  the  constant  following  up  of 
accounts  which  merit  pursuit,  but  also  to  the  cutting  from  the 
books  of  such  accounts  as  are  not  worth  the  time  nor  the  money 
to  pursue,  and  also  to  the  small,  disputed  amounts  which  may 
be  notably  bad  business  to  insist  upon.     The  retention  upon  the 


130  BUSINESS  ACCOUNTANCY 

books  of  very  small  accounts  is  not  good  business  over  any 
extended  period.  These  need  executive  attention  because  few 
treasurers  will  abandon  them  without  positive  instructions. 

It  is  quite  probable  that  the  reader  has  at  one  time  or  another 
received  "duns"  for  some  small  item  that  has  already  been  paid, 
and,  upon  which,  through  oversight  or  poor  bookkeeping,  you 
have  never  been  given  proper  credit.  After  voluminous  corre- 
spondence, you  have  mailed  a  check  to  cover  the  amount,  or 
ignored  the  letters  entirely,  firmly  resolving  to  buy  in  the  future 
from  competitors  conducting  their  affairs  more  efficiently. 

The  actual  monetary  loss,  insofar  as  reorders  are  concerned, 
as  a  direct  result  of  these  "follow-up  duns,"  cannot  be  measured, 
but  it  is  safe  to  assume  that  the  aggregate  is  many  times  greater 
than  the  original  amount  involved.  An  overpenurious  treasurer 
can  mightily  handicap  a  sales  department,  and  effectively  de- 
crease the  company's  future  sales. 

A  Striking  Illustration.  The  cost  of  carrying  small  dis- 
puted balances  can  best  be  illustrated  by  the  following  condition 
encountered  during  the  examination  of  the  books  and  accounts 
of  one  of  the  country's  large  industrial  plants.  Lest  the  impres- 
sion be  created  that  the  executives  of  this  concern  were  incom- 
petent, it  would  be  well  to  state  that  they  had  a  reputation  of 
unquestioned  business  ability.  The  fault  lay  in  confining  the 
effort  to  factory  conditions.  The  office  executives  did  not 
possess  the  necessary  powers  of  discernment  and  analysis  enabling 
them  to  observe  the  far-reaching  result  of  false  economy. 

About  350  accounts  averaging  less  than  50  cents  which  had 
been  carried  in  "suspense"  for  over  two  years  were  unearthed. 
The  statement  of  detailed  carrying-cost  of  the  accounts,  as  shown 
below,  is  based  upon  a  very  conservative  estimate  as  we  found 
that  the  credit  man,  drawing  a  salary  of  $3,000  per  year,  spent 
approximately  one  fourth  of  his  time  with  these  accounts. 

The  following  is  the  cost  of  sending  statements: 

Time  carried 1  month      12  months    24  months 

Number  of  accounts 350  350  350 

Total  amount  of  all  350  accounts $175.00         $175.00        $175.00 

Postage.. $7.00  $84.00  $168.00 

Stationery 1.75  21.00  42.00 

Clerical  labor 10.50  126.00  252.00 

Total  cost $19.25  $231.00  $462.00 

Cost  per  account .05  .66  1.32 


HANDLING  THE  CASH  131 

To  the  above  must  be  added  the  "dunning  letters,"  at  the 
rate  of  one  a  month. 

Months 12  24 

Postage $  84.00  $168.00 

Stationery 12.30  24.60 

Labor 168.00  336.00 

Total $264.30  $528.60 

Cost  per  account 75  1.51 

Consequently,  even  when  only  statements  were  sent,  the  cost 
in  two  years  would  be  $462,  and  with  letters  added,  $990.60. 
The  amount  originally  involved  in  this  case  was  about  $175. 
Obviously,  aside  from  the  irritated  customers  developed,  the 
cost  of  collection  exceeded  any  possible  return. 

Receipts.  The  ordinary  form  of  cash  book  is  a  journal 
with  a  column  arrangement  with  captions  for  the  handling  of 
the  net  amount  of  cash  received.  As  a  general  rule,  the  next 
following  account  is  that  of  "discount"  representing  cash  dis- 
counts allowed.  Both  of  these  columns  are  debit  columns,  for 
the  purpose  of  representing  what  cash  has  come  in  and  what 
discounts  have  been  allowed.  The  opposing  credits  to  these 
two  debits  are  represented  in  the  columns  entitled  "accounts 
receivable,"  "cash  sales,"  and,  where  there  is  a  large  volume  of 
transactions  with  notes  from  customers  which  are  in  turn  dis- 
counted at  the  bank,  an  extra  column  is  inserted  headed  "notes 
receivable,  discounted." 

In  addition  to  these  there  is  generally  a  "sundries"  column. 
The  sundries  column  is  ruled  to  give  enough  space  for  the  expla- 
nations, and  two  columns  representing  debit  and  credit.  In  many 
final  adjustments  of  accounts,  where  an  account  receivable  and 
an  account  payable  exist  and  a  settlement  has  been  made,  the 
final  adjustment  can  be  run  directly  through  the  cash  receipt 
book.    (See  Form  41.) 

An  improved  and  more  economical  form  of  cash  receipt  rec- 
ord has  been  devised.  This  form  is  on  the  reverse  side  of  the  cash 
disbursement  sheet  (Form  30)  already  referred  to  in  our  disburse- 
ment chapter  and  contains  all  the  principles  which  are  explained 
in  preceding  chapters.  The  advantage  of  this  system  is  that, 
where  there  are  a  large  number  of  small  receipts,  the  sheet  can 
be  inserted  in  the  typewriter  and  the  entries  quickly  transcribed. 
In  a  large  paper  box  concern,  average  daily  reports  numbered 
about  150  individual  items;  to  make  the  entries  in  longhand 


132 


BUSINESS  ACCOUNTANCY 


required  a  little  over  an  hour;  but,  done  on  the  machine,  never 
took  longer  than  35  minutes. 

The  Collection  Sheet.  Another  form  of  receipts  record  is 
the  collection  sheet.  This  is  made  in  duplicate,  the  original 
going  to  the  bookkeeper  in  order  that  he  may  post  to  the  credit 
of  the  debtors,  and  the  duplicate  going  to  the  cashier  who  dis- 
tributes the  receipts  to  the  bank  or  banks  of  deposit.  Thus  the 
duties  of  the  cashier  and  the  bookkeeper  are  quickly  performed 
without  either  interfering  with  the  other's  work.  This  form  is 
varied  somewhat  if  only  one  or  two  banks  are  used.  In  Form  53, 
designed  for  this  use,  a  perforated  slip  (Form  54)  is  attached  to 
the  margin  which,  when  folded  over  and  a  carbon  placed  between, 
records  the  distribution  to  the  banks  of  deposit  and  being  torn 
off  is  used  as  a  slip  to  turn  in  with  the  deposits. 


Forms  53-54 


The  cash  receipt  book  is  another  time-saving  device  of  great 
use  to  executives;  it  is  the  receipts  side  of  the  cash  book  and 
holds  only  the  total  of  the  receipts  each  day,  so  that  one  page 
will  contain  the  receipts  for  the  whole  month,  and,  if  more  than 
a  single  bank  be  used,  the  distribution  of  the  receipts  in  bank 
deposits.  By  taking  off  the  daily  totals  from  the  carbons  of  the 
voucher  checks  with  their  bank  distribution,  there  is  daily  at 
hand  the  receipts  and  disbursements,  the  bank  deposits,  the 
checks  drawn,  and  hence  also  the  bank  balances.  Without  this 
summary  sheet  the  totals  would  be  available  only  after  a  laborious 
taking  off  of  entries.  Executives  are  primarily  interested  in 
abstracts;  they  can  call  for  detail  if  they  desire  them. 


HANDLING  THE  CASH  133 

Cash  Receipts.  In  most  of  the  smaller  stores  little  or  no 
check  is  kept  upon  the  cash  receipts,  and  they  are  not  coordi- 
nated with  the  stock  on  hand.  They  are  correct  if  the  individual 
who  happens  to  be  taking  them  is  honest,  and  they  are  short  if 
he  is  dishonest;  in  neither  event  do  the  receipts  tell  the  owner 
anything.  If  a  sale  be  made  off  the  floor,  it  may  be  recorded  or 
again  it  may  not  be.  Cash  is  always  a  nasty  item  to  handle, 
and  it  affords  many  opportunities  for  petty  theft. 

Another  point,  not  of  accounting  but  of  profit  growing  out 
of  accounting,  is  that  the  constant  preservation  of  the  relation 
between  sales  and  stock  will  permit  the  arrangement  of  stock  on 
the  scientific  basis  of  the  sales;  that  which  is  most  in  demand 
will  be  nearest  at  hand,  and  so  on  through  the  whole  list.  In 
a  store  in  a  country  town,  a  rearrangement  of  stock  on  the  exact 
basis  of  sales  permitted  the  whole  selling  easily  to  be  cared  for 
by  two  clerks  where  formerly  three  had  been  overworked. 

It  is  always  advisable  to  have  the  cash  handled  by  some 
person  other  than  the  one  making  the  sales,  because  then  two 
people  must  conspire  before  theft  is  easily  possible;  the  record 
of  the  salesperson  and  the  count  of  the  cashier's  receipts  will 
serve  as  checks  on  each  other. 

But  where,  as  is  often  the  case,  one  person  must  both  sell 
and  handle  cash,  then  the  cash  register,  in  one  of  its  numerous 
forms,  is  the  best  known  safeguard  against  stealing.  A  failure 
to  ring  up  sales  at  the  true  amount  will  soon  be  detected  and 
the  total  receipts  as  kept  by  the  machine  will  check  the  cash 
which  should  be  on  hand. 

The  safest  of  all  systems  is  that  used  in  the  public  markets 
of  New  England.  A  sheet  called  a  "traveler"  is  given  to  the 
customer  on  entering;  on  this  the  various  clerks  enter  the  pur- 
chases and  the  amounts,  making  note  on  their  own  records  of 
the  number  of  the  traveler.  The  sheets  are  in  two  colors,  one 
for  goods  to  be  delivered  and  the  other  for  those  to  be  taken  away; 
the  first  are  assembled  in  the  delivery  room  and  the  other  at  the 
entrance.  On  leaving,  the  customer  pays  the  cashier  the  total 
charges  on  the  sheet  and  receives  a  receipt.  There  is  here  no 
chance  for  fraud;  the  customer  will  not  get  the  goods  unless  the 
sheet  is  paid,  and  the  slips  of  the  salespeople,  as  well  as  the  paid 
traveler,  check  the  cashier. 

The  Autograph  System.     The  autograph  system  has  many 
different  forms.    That  which  is  generally  used  in  department 


134  BUSINESS  ACCOUNTANCY 

stores  is  a  small  slip,  printed  in  duplicate  and  perforated;  the 
divisions  on  the  slip  are  designed  according  to  the  business. 
The  salesperson  records  all  the  necessary  facts  of  the  sale  at  the 
time  of  its  making,  and  a  carbon  between  the  sheets  gives  a 
duplicate.  The  duplicate  is  generally  inserted  in  the  package 
which  has  been  purchased;  the  original  goes  to  the  cashier's 
office,  either  with  the  cash  or,  in  a  credit  transaction,  to  the 
credit  man  for  verification  as  to  the  purchaser's  standing.  If 
the  credit  is  passed,  the  slip  then  travels  forward  to  the  book- 
keeper to  enter  the  charge.  When  the  salesman  has  filled  up 
a  book,  it  is  returned  to  the  office  and  the  total  of  the  sales  serves 
as  a  check  on  the  cashiers  and  bookkeepers. 

In  another  form  of  autograph  register  the  original  sheet  is 
carbonized  on  the  back  in  order  to  avoid  the  extra  effort  of 
inserting  carbon  sheet.  While  a  considerable  length  of  time 
may  be  saved  in  the  course  of  a  year  or  so,  it  is  debatable  whether 
the  time  saved  will  offset  the  extra  cost  of  carbonizing  the 
original  sheets. 

Roller  Autograph  Registers.  Still  another  form  of  auto- 
graph register  is  on  a  roller.  The  copies  may  be  had  in  triplicate 
or  quadruplicate,  as  desired.  With  this  system  more  elaborate 
checking  is  possible;  the  original  goes  to  the  purchaser,  and, 
where  there  are  a  large  number  of  cashiers,  the  duplicate  to  the 
cashier  with  the  cash.  The  last  two  copies  are  generally  pre- 
served on  the  rollers  in  the  machine;  one  of  them  goes  to  the 
main  accounting  department,  which  checks  up  the  list  on  this 
roll  with  the  receipts  as  turned  over  by  the  different  cashiers, 
while  the  fourth  copy  is  for  the  files  of  the  cost  department. 

The  selling  of  tickets  in  amusement  places  presents  another 
phase  of  the  problem.  Where  only  admission  is  in  question  and 
all  seats  are  either  alike  or  in  only  two  or  three  general  divisions, 
the  tickets  are  put  in  rolls  and  serially  numbered.  As  a  roll  is 
turned  over  to  the  person  in  the  selling  cage,  the  treasurer  notes 
the  first  and  the  last  numbers.  The  missing  numbers  at  the  end 
of  the  day  or  at  the  end  of  that  cashier's  period  of  duty,  deter- 
mine the  amount  of  cash  that  should  be  on  hand  from  sales. 

When  the  tickets  have  various  prices,  and  each  calls  for 
a  particular  seat,  the  checking  procedure  varies  from  the  above 
only  in  detail.  The  number  of  seats  in  each  section  is  known 
by  the  management  and  missing  tickets  must  be  replaced  by 
cash  in  the  till  or  proper  authorizations  for  "complimentary" 


HANDLING  THE  CASH  135 

passes.  The  torn-off  stubs  which  are  thrown  into  the  box  as 
the  holder  passes  through  the  entrance  give  an  additional  check. 

Restaurants  sometimes  have  difficult  cash  problems  because 
of  the  transient  character  of  waiters  and  the  large  number  of 
waiters  who  must  be  taken  on  for  a  day  or  two  in  busy  times. 
A  double  check  is  necessary.  A  checker  takes  note  of  the  items 
on  the  waiter's  order  blank,  stamps  the  prices  thereon,  and  also 
stamps  them  on  a  tally  sheet  under  the  number  of  the  waiter. 

In  well-regulated  establishments  the  cashier  adds  the  final 
card  for  the  customer  and  receives  the  money  from  the  waiter, 
a  receipt  stub  being  torn  off  for  the  customer.  The  total  collec- 
tions of  the  cashier  must  agree  with  the  totals  of  the  tally  sheets; 
if  they  do  not  agree,  the  tally  sheets  are  compared  with  the 
waiter's  checks  and  the  error  located.  The  loss  must  be  between 
the  cashier  and  the  waiter,  and  the  payment  is  usually  divided 
between  them.  Waiters  taken  on  for  the  day  are  not  commonly 
paid  until  after  the  tallies  are  made  up. 

Two  Kinds  of  Collections.  Collections  are  in  two  divi- 
sions, (1)  by  mail,  and  (2)  by  collectors.  Mail  collections  are 
attended  to  as  a  rule  by  the  cashier.  In  very  large  businesses 
the  cashier  handles  the  checks  only  after  all  other  records  have 
been  made.  When  collectors  are  used,  the  cashier  is  the  final 
recipient  of  the  cash  collected,  and  in  a  way  is  absolved  in 
accounting  from  any  deficiency  which  may  arise  through  the 
misappropriation  by  the  collectors. 

The  chances  for  loss  through  inaccuracy  or  petty  theft  by 
the  use  of  collectors  are  great.  The  collector  has  an  excellent 
opportunity  to  graft  a  dollar  here  and  a  dollar  there,  and  by 
paying  one  day's  thefts  with  the  receipts  of  the  next  can  continue 
stealing  for  an  almost  indefinite  period.  Take  the  case  of  a 
well-known  gas  company  which  had  over  80%  of  its  meters  on 
the  "slot"  basis.  The  collectors  took  in  from  $10,000  to  $12,000 
a  month  in  cash.  No  actual  supervision  over  these  men  was 
kept,  and  there  was  no  checking  up  on  the  meter  records.  It 
was  decided  to  shift  the  collectors  about,  and  immediately  most 
of  them  quit  their  jobs.  The  receipts  under  the  new  arrange- 
ment exceeded  the  old  by  several  thousand  dollars  a  month! 

Collection  honesty  is  best  preserved  by  frequently  switching 
the  men  to  different  routes;  then  the  confusion  in  bills  will 
promptly  show  up  previous  dishonesty.  A  simple  form  of 
collector's  receipt  is  given  in  Form  55. 


136 


BUSINESS  ACCOUNTANCY 


Entering  the  Receipts.  The  receipts  are  simply  the  set- 
tling of  the  accounts  receivable;  the  billing  of  these  accounts 
was  taken  up  in  the  preceding  chapter  as  well  as  the  sending  out 
of  statements  at  the  end  of  the  month,  the  statements  being 
made  out,  in  the  more  advanced  styles,  at  the  same  time  as  the 
ledger  account.  In  the  smaller  concern  the  statements  will  be 
made  at  the  end  of  the  month  by  hand. 

The  same  procedure  as  is  followed  in  the  making  of  the 
ledger  accounts  is  followed  with  the  receipts;  they  are  entered 
on  the  collection  sheets  or  the  cash  book  as  described  earlier  in 
this  chapter,  and  only  the  totals  posted  to  the  proper  ledger 
accounts  by  hand  or  by  one  of  the  methods  similar  to  that  used 
for  the  ledger  accounts. 

Since  all  accounting  should  produce  records  that  can  be 
analyzed,  it  is  desirable  to  distribute  collections  according  to 
geographical  or  collection  districts  for  executive  study.  The 
whole  matter  of  entering  receipts  is  simple  and  is  shown  in  the 
progress  of  the  hypothetical  company  which  is  being  recorded. 


Shrrt  No. 

COLLECTOR'S    RECEIPT 

Debtor                                  Cash 

Discount    |     Expense     |  fg™ 

Old  Balance 

ll 

^_ 1    j ■ 

~~ 

_ 

1      . 

ii 

■ 

Form  55 

Ml     111     IS 

THE  SPECIALTY  COMPANY 

In  order  to  keep  the  headway  of  the  company  the  usual 
purchases  and  disbursements  are  made,  but,  for  the  first  time, 
receipts  come  into  the  accounting.  The  transactions  are  stated 
in  a  general  way  to  give  material  for  the  proper  ledger  accounts. 

Purchases  for  the  month  of  June,  1918: 

Materials  and  supplies $1,477.10 

Expense 636.15        $2,113.25 

Payroll  for  the  month 1,350.75 

Interest  accrued 41.67 


HANDLING  THE  CASH  137 

Disbursements : 

Accounts  payable. . .  .$1,802.22;  cash  discount $36.78 

Imprest  petty  cash  fund  created 150.00 

Sales 14,350.25 

Receipts: 

Sale  of  97  shares  unissued  stock  for 9,700.00 

From  accounts  receivable: 

In  cash $2,053.97;  discount 63.53 

Note  for  90  days  with  interest  at  6% 1,550.00 

From  sale  of  scrap 150.00 

Proceeds  of  note  discounted  at  bank,  60  days 4,950.00 

The  foregoing  transactions  are  reflected  in  the  ledger  accounts 
as  shown  in  Forms  S77  to  S95,  inclusive. 


(Ledger)             Capital  Stock  Unissued 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

June 
July 

1 

1 

Balance 
Balance 

69 

700 

00 

June 
•i 

10 

30 

Sale  97 

Share  s 

Balance 

9 

60 

700 
000 

00 
00 

69 

700 

00 

69 

700 

00 

60 

000 

00 

Fonr 

S* 

77* 

(Ledger)            Capital  Stock  Authorized 

Date 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

June 

1 

100 

00( 

00 

Form 

S- 

7cH , 

(Ledger)             Buildings  and  Equipment 

Date 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

June 

1 

Balance 

18 

500 

00 

Forir 

iS- 

79  U J 

138 


BUSINESS  ACCOUNTANCY 


(Ledger)              Furniture  and  Fixtures 

Date 

It  em  a 

Fol. 

Debit 

Date 

Items    Fol.l 

Credit 

June 

1 

Balance 

900 

00 

— 

— — 

Forn 

iS- 

R(\   I 

(Ledger)                 Cash  in  Bank 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

June 

1 

Balance 

852 

34 

June 

30 

Payroll 

1 

350 

7? 

10 

Sale  Capital 

■ 

30 

Accounts 

Stock 

9 

700 

00 

Payable 

1 

802 

22 

• 

JO 

Accounts 
Receivable 

2 

053 

97 

n 

30 

Petty 
Caeh 

150 

00 

^° 

Scrap  Sales 

150 

00 

• 

30 

Balance 

1440 

34 

July 

50 

1 

Note  Payable 
Balance 

4 

950 

00 

17 

70  6 

31 

17 

706 

31 

14 

403 

34 

Forn 

iS 

.81  1 1 

(Ledger) 


Petty  Cash 


Date  I   Items      Fol 


Debit         Date 


Items         Fol.  Credit 


Junepo||   Cash 


FormS-82  L_ 


150 


00 


(Ledger) 


""I 


Date   I       Items 


Accounts  Receivable 


Fol. 


Debit 


Date 


Items 


Fol, 


Credit 


June 


Balance 
Sales 


Form  S-83 


18 


14 


667 
350 


017 


350 


June 


Note  Rec, 
Cash 

Balance 


75 


25 


18 


550 

117 
350 


017 


75 


HANDLING  THE  CASH 


139 


(Ledger)                                     Bond  and  Mortgage 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

June 

1 

10 

000  00 

Form  S-i 

^T— ^__ 

""""■■*        ~ 
(Ledger)                                       Interest  Accrued 

Date 

I  terns 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

June 

1 

June 
n 

1 

3c 

Balance 

Mortgage 
Payable 

41 
41 

67 
67 

Form 

S- 

J8  L 

140 


BUSINESS  ACCOUNTANCY 


(Ledger)                                  Materials  and  Supplies 

Date 

1 
Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

June 

a 

1 
30 

Balance 
Charge 
Reg'r. 

13 

l 

352  90 
477  10 

14 

830 

00 

Form 

S-i 

19    I 

(Ledger)                                          Payroll 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

June 

n 

1 
30 

Balance 
Cash 

7 

1 

053 

350 

50 

75 

8 

404 

25 

Form 

s-s 

0  i — 1 

(  Ledger)                                      Expense 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

June 
ti 

1 

30 

Balance 
Charge  Reg'r. 

1 

823 
636 

85 
15 

2 

460 

00 

Form 

S-< 

In 

(  Ledger)                                      Interest 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

June 
11 

1 

30 

30 

Balance 
Mortgage 
Payable 
Hote  Payable 

466 

41 
50 

67 

67 
00 

558 

34 

1 

Form 

S-< 

\n 

HANDLING  THE  CASH 


141 


(Ledger)                                                Sales 

Date 

I  terns 

Pol. 

Debit 

Date 

Items 

Fol. 

Credit 

June 

■ 

1 
30 

Balanoe 
Sales 

3 
14 

667 
350 

50 

25 

18 

017 

75 

Forn 

iS- 

93  [ 1 

(Ledger)                                            Cash  Discount 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

June 

30 

Accounts 

Receivable 
Balance 

63 
41 

53 

3^ 

June 

H 

July 

1 
30 

l 

Balance 
Accounts 
Payable 

Balance 

68 
36 

09 
78 

104 

87 

104 

87 

41 

34 

Forn 

iS 

-94~L 1 

(Ledger) 

Other  Income 

Date 

Items 

Fol. 

Debit 

Date 

Items 

Fol. 

Credit 

L 

June 

30 

Sale  Scrap 

1 

150 

00 

Form  S- 

95  i 

The  resultant  trial  balance  is  shown  in  Form  S96. 


Trial 

Balance 

Date:   June  V).    1918 

Debit 

Credit 

Capital  Stock  Unissued 

60 

000 

00 

Capital  Stook 

Building  and  Equip- 

Authorized 

100 

000 

00 

ment 

18 

500 

00 

Bond   and  Mortgage 

10 

000 

00 

Furniture  and  Fixtures 

900 

00 

Accounts  Payable 

2 

813 

75 

Cash  in  Bank 

14 

403 

34 

No,tes  Payable 

5 

000 

00 

Petty  Cash 

150 

00 

Interest  Accrued 

83 

3* 

Accounts  Receivable 

14 

350 

25 

Sales 

18 

017 

75 

Notes  Receivable 

1 

550 

00 

Cash  Discount 

41 

34 

Materials  and  Supplies 

14 

830 

00 

Other  Income 

150 

00 

Payroll 

8 

404 

25 

Expense 

2 

460 

00 

Interest 

558 

3* 

Total 

136 

106 

18 

136 

106 

18 

»™*_o*l     "^ 

CHAPTER  DC 

BALANCING  THE  BOOKS 

IN  previous  chapters  we  have  looked  at  the  recording  of  the 
various  transactions  which  go  to  make  up  the  cycle  of 
business  from  the  purchase  of  and  payment  for  the  raw 
materials  to  their  sale  as  finished  products  and  to  the  resulting 
cash  receipts.  From  time  to  time  ways  for  detecting  losses 
have  been  pointed  out,  but  the  real  reason  for  the  doing  of 
business — the  making  of  a  profit — has  not  been  touched  upon. 

Why  the  Books  Were  Opened.  The  records  have  all  been 
made  for  the  purpose  of  discovering:  first,  whether  our  venture 
was  profitable;  and  second,  how  the  result  came  about.  In  the 
system  of  double  entry  bookkeeping  which  has  been  followed, 
the  records  have  been  of  two  sorts — the  fact  records  such  as 
cash,  accounts  receivable,  accounts  payable,  and  the  like;  and 
the  historical  records  such  as  merchandise,  labor,  and  all  the 
so-called  "nominal"  accounts.  The  first  class  of  records  inform 
us  of  our  standing;  the  second,  of  how  we  arrived  at  it. 

To  find  out  the  result  of  our  operations  through  the  period 
we  must  first  "close  the  books."  Under  the  present-day  prac- 
tice the  name — as  are  so  many  names  which  have  survived  in 
bookkeeping — is  somewhat  misleading.  Instead  of  defining  the 
phrase  according  to  its  literal  meaning,  take  this  definition  of 
the  results  of  the  process:  "the  assembling  of  the  accounts  to 
discover  the  condition  of  the  company  or  individual  which 
exists  at  some  given  time." 

In  the  foregoing  chapters  no  attempt  has  been  made  to 
cover  all  the  possible  transactions  in  all  the  possible  divisions 
of  business;  a  volume  of  10  times  the  size  of  the  present  one 
would  not  be  nearly  large  enough  for  such  a  task;  even  if  a 
human  mind  could  make  provision  for  every  entry  in  every  detail 
of  every  kind  of  enterprise,  the  resulting  compilation  would  not 
be  of  much  practical  use.  For  books  cannot  be  kept  by  purely 
formal  instructions;    there  cannot  be  devised  a  scheme  which 

142 


CLOSING  THE  BOOKS  U3 

will  permit  a  vacation  of  the  brain  of  the  man  who  makes  the 
entries  and  the  substitution  of  numerous  directions  therefor. 

Accounting  Principles  are  Universal.  The  principles  of 
recording  are  simple;  once  the  general  system  is  understood, 
then  the  application  gives  little  trouble.  The  principles  have 
been  given;  if  they  are  not  now  plain,  they  should  be  studied 
until  they  are  perfectly  clear.  An  uncomprehended  system  of 
accounts  will  work  havoc  wherever  it  is  installed.  There  is 
nothing  about  any  phase  of  accounting  in  any  single  business 
which  the  ordinary  business  man  should  not  be  able  to  grasp 
and  therefore  to  apply  in  practice.  There  is  no  mystery  in  good 
accounting;   only  the  charlatan  will  seek  to  create  a  mystery. 

The  same  "principles"  of  accounting  will  apply  to  any  kind  of 
business;  I  have  taken  the  manufacturing  division  because  it 
has  more  accounts  than  a  concern  which  sells,  say,  only  personal 
services.  The  wholesale  and  retail  merchants  are  between  the 
two  extremes.  A  more  detailed  study  of  the  problems  of  several 
divisions  of  business  will  be  given  later  in  this  volume.  Now 
the  thought  is  to  get  the  fundamentals  firmly  in  mind. 

Obviously,  among  the  professions,  the  engineer  who  sells 
his  services  only,  has  little  if  any  need  for  the  elaborate  pur- 
chasing and  stores  system  that  I  have  detailed.  His  purchases 
are  restricted  to  drafting  room  and  office  supplies.  But  he 
should  keep  track  of  his  supplies,  for  they  are  many  and  it  is 
all-important  that  they  be  on  hand  when  needed.  Loose  super- 
vision of  expenditures  for  supplies  means  less  profit.  We  have 
sketched  the  skeleton  to  be  used  in  most  business  accounting 
systems.  That  skeleton  is  to  be  dressed  to  suit  the  particular 
need;  many  of  the  variations  will  be  later  developed. 

Closing  the  Books  in  the  Old  Days.  A  step  that  is  com- 
mon to  all  accounting  is  "closing  the  books" — in  other  words, 
ascertaining  the  profit. 

Long  ago,  closing  the  books  was  a  momentous  matter  and 
was  attempted  only  infrequently.  The  term  "closing  the 
books"  was  probably  derived  from  the  literal  practice.  Inven- 
tories were  taken,  such  inventories  embracing  all  physical 
possessions — ships,  cargoes,  stores  in  foreign  countries,  "bills" 
receivable  from  customers,  sums  loaned,  and  all  else  that  had 
a  value,  most  of  which,  in  the  days  of  single  entry  bookkeeping, 
had  not  had  a  place  on  the  books.  The  task  was  as  much  a 
process  of  memory  as  of  bookkeeping,  the  bookkeeper  often  being 


144  BUSINESS  ACCOUNTANCY 

only  an  aid  or  scribe,  the  listing  and  pricing  being  a  task  under- 
taken by  the  partners. 

In  addition  to  the  listing  of  the  assets,  giving  the  total  re- 
sources available — and  the  assets  were  then  generally  termed 
"resources" — the  commitments  or  liabilities  were  listed.  The 
latter  were  deducted  from  the  sum  total  of  the  resources  and 
the  result  was  the  firm's  net  worth.  If  the  net  worth  exceeded 
that  of  the  preceding  period,  the  difference  was  the  profit;  if  a 
decrease  were  recorded,  a  loss  had  been  sustained. 

This  setting  off  of  liabilities  against  assets  gave  an  approxi- 
mate result  in  dollars,  but  the  figures  gave  no  clew  as  to  the 
origin  of  either  profit  or  loss.  The  profit  or  the  loss  was  the 
result  of  the  operations  as  a  whole.  The  great  step  in  modern 
accounting  has  been  the  localizing  of  profit  or  loss. 

It  is  true  that  formerly  separate  calculations  were  made  of 
certain  transactions;  a  contractor  might  keep  accounts  for  this 
or  that  job  and  determine  his  profits  thereon;  but  he  seldom 
calculated  in  the  materials  which  he  had  on  hand  before  the  job 
began  and  he  knew  little  or  nothing  of  overhead  expense;  the 
jobs  on  which  he  figured  that  he  had  made  a  profit  were  quite 
as  often  losses  as  gains  unless  the  margin  of  profit  had  been 
out  of  all  proportion  to  the  costs.  Manufacturers  seldom 
counted  other  than  the  total  transactions  of  the  year  and  had 
nothing  more  than  rough  estimates  of  the  actual  state  of  their 
various  articles  of  fabrication  or  of  their  markets. 

Merchants  frequently  kept  tally  of  single  deals;  they  dis- 
covered their  gross  profits.  For  instance,  if  ivory  were  bought 
on  the  West  Coast,  they  knew  the  purchase  price,  the  carriage 
to  Europe,  the  cost  of  handling,  and  the  selling  price.  The 
selling  price  less  the  costs  gave  the  gross  profit,  but  no  means 
existed  for  determining  the  selling  expense  or  any  of  the  other 
numerous  items  which  make  such  inroads  on  gross  profit.  There 
were  no  harmonious,  interlocking  systems  of  accounting  to  bring 
business  into  a  cohesive  mass. 

Therefore,  since  only  after  closing  the  books  could  the  results 
of  the  year  be  had,  the  date  of  footing  up  and  setting  off  was 
epochal.  The  business  traveled  from  year  to  year  in  anticipation 
and  sometimes  in  dread  of  the  final  findings.  Once  the  books 
had  been  closed,  they  passed  out  of  active  use  and  into  the 
archives  of  the  business,  where  the  neatly  labeled  tomes  joined 
their  predecessors  in  the  dusty  vaults.  Then  new  books  were 
"opened." 


CLOSING  THE  BOOKS  145 

Modern  Closing  of  Accounts.  Today  progressive  com- 
panies seldom  or  never  close  their  books  in  the  old  sense  of 
ruling  off  all  accounts,  putting  aside  the  books  and  opening 
new  volumes.  The  accounts  are  often  ruled  off  once  a  year  or 
oftener  for  convenience  and  new  accounts  started  with  the 
balance  brought  forward  for  the  start  of  the  next  fiscal  period; 
but  these  new  accounts  are  directly  under  the  old  accounts  if 
space  remains  on  the  page;  they  are  ruled  off  only  to  save  use- 
less additions;  the  looseleaf  ledger  has  helped  toward  common 
sense  in  the  physical  matter  of  accounting. 

Since  the  general  ledger  contains  only  abstracts  of  the  ac- 
counts, it  has  comparatively  few  entries;  a  single  page  will 
often  hold  the  items  of  a  not  very  active  account  for  several 
years.  The  advantage  of  having  previous  years  in  the  ledger  is 
plain;  it  saves  tne  time  consumed  in  the  ceremony  of  getting 
out  the  books  of  former  years  to  trace  back  accounts  about 
which  some  question  has  arisen.  Modern  bookkeeping  sacri- 
fices no  convenience  for  mere  formality.  In  the  older  methods, 
convenience  was  never  considered. 

Closing  the  books  has  lost  its  importance,  its  epochal  char- 
acter, because  it  is  not  now  the  only  way  of  discovering  con- 
ditions. As  will  later  be  seen,  cost  accounting  provides  a  much 
more  accurate  and  convenient  method. 

To  close  the  books  is  to  balance  and  rule  off  all  of  the  accounts 
on  the  general  ledger — this  is  the  formal  closing.  A  less  formal 
and  more  practical  way  is  to  take  off  a  "trial  balance"  of  these 
accounts  and  from  this  trial  balance  to  construct  a  "statement 
of  condition"  and  also  a  "statement  of  operations." 

Do  Not  Close  Too  Frequently.  Many  concerns  actually 
close  by  balancing  off  all  of  their  accounts  every  month  and 
transfer  the  profit  or  loss,  as  the  case  may  be,  to  their  profit  and 
loss  account.    This  involves  too  much  detailed  and  useless  work. 

Quite  a  number  of  concerns  close  up  quarterly  or  semi- 
annually. The  disadvantage  of  periodic  closing  in  a  large  busi- 
ness is  that  the  accounting  department  cannot  always  get  in 
all  of  the  charges  which  are  applicable  to  the  period.  Sometimes 
the  charges  are  forgotten  and  the  period  thus  gives  false  results; 
or,  if  they  are  picked  up  in  time,  a  number  of  so-called  surplus 
of  profit  and  loss  adjustment  entries  are  made  necessary.  The 
net  result  is  a  loading  of  the  bookkeeper  with  purely  formal, 
non-profit-making  labor. 


146  BUSINESS  ACCOUNTANCY 

The  practical  way  is  to  close  the  accounts  once  a  year — at 
the  end  of  the  fiscal  period.  But  the  ascertainment  of  profits 
cannot  wait  a  yearly  period.  Therefore  construct  a  trial  balance 
— which  will  give  all  the  accounting  facts — once  a  month.  If 
the  accounts  balance,  one  generally  need  not  worry  about  a 
clerical  error  having  been  made  in  that  month,  and  thus  an 
error  in  a  subsequent  month  can  be  localized. 

Many  companies  still  close  their  books  once  a  year  only — 
and  close  formally.  Others,  with  modern  systems,  have  the 
ability  to  close  more  frequently — semiannually,  quarterly, 
monthly,  weekly,  and  in  the  case  of  some  companies,  notably 
financial  institutions,  daily.  The  oftener  you  know  your  con- 
dition, the  better  off  you  are.  On  the  other  hand,  too  frequent 
and  close  consideration  may  spoil  the  perspective.  For  ordinary 
purposes,  a  monthly  review  of  operations,  and  the  resulting 
financial  conditions,  is  sufficient. 

The  books  are  closed  and  the  statements  made  as  of  a  par- 
ticular time.  If  as  of  December  31,  the  statement  runs  to  mid- 
night of  that  day  and  the  new  accounts  start  immediately. 
There  is  no  period  between  the  closing  of  the  old  books  and  the 
opening  of  the  new — no  lapse  in  accounting — whether  the 
closing  be  actual  and  formal  or  only  a  fiction. 

The  first  step  is  to  balance  the  books — to  have  all  of  the 
respective  accounts  agree  as  to  debit  and  credit.  There  is  a 
distinction  between  "closing"  and  "balancing."  The  balances 
are  taken  only  to  make  sure  that  no  errors  have  been  made  in 
the  mathematics. 

Why  the  Book  Records  Are  Incomplete.  The  books  will 
show  the  total  sales  and  the  total  expenses.  The  total  sales 
less  the  total  expenses  will  not  give  us  the  profit,  because  one 
highly  important  factor  is  missing — what  we  have  in  stock. 
Take  the  Specialty  Company,  whose  fortunes  we  have  been 
following,  as  a  concrete  illustration.  The  accounts  already 
given  show  that  the  company  has  made  expenditures  for  goods 
intended  to  be  sold  or  for  expenses  incurred  in  the  course  of 
operating,  namely: 

Materials  and  supplies $14,830.00 

Payroll  (expended  for  labor) 8,404.25 

Expense 2,460.00 

Interest 558.34 

Total $26,252.59 


CLOSING  THE  BOOKS  147 

The  sales  amount  to  $18,017.75.  If  we  have  sold  all  our 
goods,  costing  with  processing  and  other  expenses  $26,252.59, 
we  shall  have  lost  approximately  $8,000.  The  amount  of 
money  we  have  made  therefore  depends  upon  what  proportion 
of  the  goods  purchased,  plus  fabricating  expenses,  is  represented 
by  the  sales  made.  That  can  be  ascertained  only  by  deducting 
the  goods  still  on  hand  from  those  bought  to  find  the  amount 
shipped — that  is,  the  amount  represented  by  the  sales. 

The  books  which  the  Specialty  Company  has  kept  do  not 
show  what  we  have  in  stock  or  what  proportion  has  been  shipped ; 
they  show  only  the  sales  price  received  for  an  undetermined 
proportion  of  the  total  purchases.  In  short  our  books  show 
everything  but  the  goods  left,  and  the  value  of  these  must  be 
determined  by  counting  and  valuing — by  taking  an  inventory. 

The  Inventory.  The  value  of  the  raw  materials  and  sup- 
plies, the  goods  in  process  of  manufacture,  and  the  finished  goods, 
are  the  uncertain  items.  In  the  case  of  a  trading  concern,  there 
will  be  only  the  goods  on  hand  for  resale  and  the  incidental 
supplies,  but  although  the  classification  of  items  is  reduced,  the 
number  of  items  will  probably  be  greater  than  in  the  manu- 
facturing business  and  the  value  will  also  proportionately  be 
greater,  so  that  the  inventory  is  critical. 

It  is  possible  to  keep  a  perpetual  inventory  so  that  a  physical 
count  is  seldom  necessary.  Where  this  is  possible  it  should  be 
done.  Where  commodities  are  handled  in  bulk,  such  as  coal 
or  wood,  it  is  easy  to  keep  track  of  exactly  how  much  remains 
by  weighing  what  comes  in  and  what  goes  out  and  making 
an  allowance  for  shrinkage  fixed  after  careful  experiments;  or, 
if  only  a  few  lines  or  large  articles  are  handled,  the  process  is 
equally  simple  and  obvious.  But  in  retail  merchandising  it  is 
too  cumbersome  a  task  to  deduct  each  sale  from  the  stock. 
The  retail  system  for  this  purpose  is  given  in  Chapter  XXII. 

The  Relation  of  the  Inventory  to  Profits.  The  inven- 
tory, in  the  absence  of  a  cost  system,  is  the  first  real  step  toward 
ascertaining  profit.  It  is  complicated  or  simple  according  to  the 
nature  of  the  business.  If  proper  stock  records  have  been  kept 
as  described  in  Chapter  V  and  a  physical  count  has  been  made 
on  the  receipt  of  purchases,  it  will  not  be  necessary  to  stop 
business  at  all  or  to  make  another  count.  All  the  facts  can  be 
had  from  the  cards.  In  a  retail  store,  the  detailed  stock  records 
are  scarcely  practical  and  an  actual  count  must  be  made.     But, 


148  BUSINESS  ACCOUNTANCY 

in  general,  the  inventory  should  always  be  taken  (and  thus  the 
fiscal  period  is  determined)  at  the  season  of  the  year  when  the 
stock  will  commonly  be  at  its  lowest  point. 

The  several  practical  methods  of  taking  the  physical  inven- 
tory of  materials  and  supplies  are  scarcely  matters  of  accounting. 
The  best  method  is  the  one  which  will  give  accurate  results  in 
the  shortest  possible  time.  If  the  stock  be  large,  a  team  ar- 
rangement is  desirable;  some  very  large  plants  precede  the 
inventory  by  a  crew  which  counts  and  places  tags  on  the  articles 
or  groups  of  articles. 

The  inventory  is  not  taken  of  fixed  assets  such  as  equip- 
ment, buildings,  and  the  like,  for  they  are  already  on  the  books. 
It  is  true  that  we  loosely  use  the  term  " inventory"  to  describe 
all  of  the  physical  assets  of  a  concern,  but  as  ordinarily  employed 
the  word  denotes  only  the  material  and  supplies — whether  raw, 
in  process,  or  in  the  form  of  finished  goods. 

The  Question  of  Pricing.  It  is  the  pricing  rather  than 
the  manner  of  taking  of  the  inventory  which  is  here  important. 
The  rules  for  values  are  arbitrary  and,  to  some  extent,  unrea- 
sonable, but  they  are  accepted  everywhere  and  bankers  look 
askance  at  any  departure  from  them.     Here  they  are: 

1.  Value  at  cost. 

2.  If  the  cost  is  above  the  market,  then  value  at  the  market. 

3.  If  the  cost  is  below  the  market,  do  not  raise  the  values — 
keep  them  still  at  cost. 

It  is  not  logical  to  bring  down  cost  to  the  market  and  at  the 
same  time  refuse  to  raise  the  inventory  if  the  market  is  above 
the  cost;  but  the  procedure  is  so  established  that  it  should  not 
be  departed  from.  And  also  it  does  prevent  a  mere  bookkeeping 
profit  from  appearing  as  an  actual  profit.  An  excellent  practice 
is  to  value  according  to  the  above  rules  and  attach  a  footnote 
showing  the  increased  values  according  to  market  prices.  This 
gives  the  necessary  information  without  inflation. 

Recently  while  prices  have  been  rising,  the  question  of  the 
value  of  material  contracts  has  come  up.  If  you  have  a  contract 
for  the  purchase  of  material  at  a  price  which,  at  the  inventory 
time  is  below  the  market,  undoubtedly  that  contract  is  a  lia- 
bility. But  what  of  the  advantageous  contract?  Is  it  not  an 
asset? 


CLOSING  THE  BOOKS  i49 

Undoubtedly,  under  these  circumstances,  a  company  actually 
possesses  something  of  value  aside  from  its  customary  book 
assets.  The  considerations  are  several,  and  all  depend  upon 
the  surrounding  circumstances.  Let  us  instance  sugar,  steel, 
and  so  forth,  which  have  a  daily  changing  market  value.  The 
presumption  is  that  if  all  materials  on  contract  were  delivered 
before  the  day  of  accounting  they  could  be  disposed  of  at  the 
market  price.  Of  course  the  market  might  break  somewhat 
before  the  unloading  was  completed. 

Ordinarily,  however,  the  manufacturer  is  entitled  to  call  the 
present  excess  in  value  above  the  market  price  a  profit  which 
he  has  made  through  speculation,  chance,  or — as  he  will  doubt- 
less call  it — good  judgment.  Sometimes  contracts  are  sold 
to  others  at  an  increase,  if  the  original  buyer  cannot  use  the 
goods,  and  the  potential  profit  is  proven  to  exist.  So  much  for 
the  buyer  of  a  staple  item  having  a  daily  market  price. 

The  process  cannot,  however,  be  as  easily  followed  by  the 
buyer  of  uncommon  commodities  such  as  sponges,  some  chem- 
icals, and  so  on.  Here  a  price  can  be  obtained,  but  it  is  in  the 
nature  of  a  quotation  at  which  more  can  be  bought  and  the 
manufacturer  is  without  assurance  that  he  can  sell  at  that  price. 

Where  Experts  Disagree.  Say  the  public  accountants: 
"An  inventory  on  hand  must  be  taken  at  cost — you  must  not 
appreciate,  for  you  are  without  proof  that  you  can  sell  at  the 
appreciated  price. "  But  if  the  market  drops  below  the  cost 
price  the  practice  proves  inconsistent,  for  then  the  public  ac- 
countants demand  reserves  for  possible  loss,  neglecting  the 
fact  that  if,  when  the  market  is  up,  we  cannot  give  assurance 
that  we  can  sell  at  the  market  price,  there  is  similarly  no  assur- 
ance when  the  market  is  down,  that  we  must  sell  at  that  price. 

A  careful  accountant,  when  he  discovers  the  existence  of 
contracts  for  undelivered  materials  which,  until  delivery,  neces- 
sarily do  not  appear  on  the  general  ledger,  must  needs  show  on 
the  balance  sheet    a  " contingent  liability  for  so  and  so  much." 

I  admit  the  desirability  of  putting  inventories  in  at  cost,  for 
that  is  a  definite  quantity,  and  if  the  market  is  down,  deduct  from 
profit  and  establish  a  "reserve  for  possible  loss  on  inventory," 
and  if  unshipped  contracts  exist,  show  the  fact  in  orthodox 
fashion,  even  to  the  extent  of  setting  up  a  further  reserve  if 
the  materials  the  manufacturer  must  later  take  were  contracted 
for  at  unfavorable  prices. 


150  BUSINESS  ACCOUNTANCY 

When  the  Market  Is  Up.  But  if  the  market  is  up  I  try- 
to  give  the  manufacturer  his  due  in  the  statement.  I  again 
inventory  at  cost  but,  by  means  of  an  asterisk  and  a  footnote, 
inform  the  reader  that  at  today's  market  price,  an  added  value 
exists,  which  though  not  made  a  part  of  surplus,  because  the 
act  of  sale  has  not  been  consummated,  deserves  consideration 
as  a  potential  asset.  Similarly,  while  still  denoting  contingent 
liability  on  contracts  for  undelivered  contracts,  I  do  not  hesitate 
to  state  that,  at  today's  market,  a  potential  added  profit  of  so 
many  dollars  exists,  which  is  not  included  in  the  surplus.  This 
presents  the  actual  condition  of  the  company  without  including 
a  purely  book  profit  on  the  statement. 

This  method  of  directing  attention  to  today's  actual  stand- 
ing, but  not  altering  the  surplus,  is  eminently  fair.  A  contract 
that  today  might  justly  be  regarded  as  an  asset,  tomorrow  may 
be  a  liability. 

A  caution  must  be  had  against  "conservative"  appraising 
for  the  inventory  and  thus  setting  up  a  reserve  in  the  price  of 
the  goods  themselves  instead  of  in  a  distinct  reserve  account. 
Unless  the  inventory  costs  are  correct,  the  subsequent  profit 
figures  will  be  incorrect  and  one  may  be  led  to  sell  at  too  high 
a  price  and  thus  lose  business. 

When  the  Price  Fluctuates.  Where  the  raw  material 
fluctuates  rather  rapidly,  as  brass  or  copper,  some  concerns 
inventory  a  fixed  part  of  their  stock  at  an  arbitrary  price  which 
is  well  below  any  figure  the  market  will  be  likely  to  reach.  Then 
the  remainder  of  the  stock  is  priced  at  market,  or  at  cost  if  the 
cost  is  below  the  market.  One  manufacturer  who  followed  this 
plan  complained  that  he  could  not  sell  at  a  profit  against  the 
prices  of  his  competitors;  I  found  that  the  only  reason  he  could 
not  meet  competitors'  prices  was  that  he  carried  his  inventory 
too  low;  it  absorbed  so  much  of  his  values  that  the  apparent 
profit  was  considerably  lower  than  the  real  profit. 

If  the  raw  material  values  fluctuate,  carry  them  at  cost  and 
set  up  a  reserve  for  the  difference  between  the  cost  and  the 
market  value.    Then  you  will  be  both  safe  and  accurate. 

The  merchant  has  to  consider  only  the  stock  in  hand;  he 
knows  how  much  it  cost  him  and  he  knows  the  market,  therefore 
he  can  find  his  inventory  values  with  accuracy  even  if  not  with 
dispatch  in  the  absence  of  the  cost  system.  But  the  manu- 
facturer who  has  transformed  some  of  the  goods  which  he  bought 


CLOSING  THE  BOOKS  151 

by  adding  to  them  labor  and  supplies  has  two  additional  in- 
ventory heads — "goods  in  process"  and  "finished  goods" — 
neither  of  which  he  can  exactly  value  without  a  cost  system. 

Goods  in  Process.  Only  a  cost  system  can  give  more  than 
an  approximation  of  the  value  of  this  item  and  hence  it  is  that 
the  manufacturer  without  cost  accounting  never  knows  his 
real  profits.  The  amount  of  labor,  material,  and  manufacturing 
expense  which  has  gone  into  the  item  is  estimated  with  the  best 
knowledge  available,  but  only  by  rule  of  thumb.  You  can  give 
an  expert  guess  and  that  is  all;  there  are  no  rules  for  guessing, 
and  no  accurate  method  of  knowing  without  a  cost  system. 

Having  found  all  the  facts  within  your  reach  and  made  your 
best  guess,  you  must  make  sure  that  your  guess  does  not  exceed 
the  selling  price  of  the  completed  article.  It  seems  almost 
absurd  to  give  this  caution,  but  unfortunately  it  is  quite  neces- 
sary. I  have  found  many  manufacturers  and  contractors  who 
had  not  detected  that  the  cost  of  the  work  had  exceeded  its 
possible  value  and  they  were  charting  losses  as  assets.  In 
any  large  contract,  figures  should  be  devised  to  show  from 
month  to  month  percentage  of  completion  and  to  compare 
the  cost  with  the  contract  price. 

For  instance,  if  the  contract  price  is  $100,000  and  the  con- 
tract, 40%  finished,  has  cost  $37,500,  inventory  at  that  figure. 
But  if  the  cost  is  $50,000,  do  not  carry  at  $50,000,  for  then  you 
will  be  inflating  your  assets,  as  you  still  have  $60,000  in  work  to 
perform.  You  must  take  as  an  asset  what  the  contract  is  really 
worth  to  you  at  that  point — $40,000 — and  charge  off  $10,000 
against  the  period  as  a  loss.  If  at  the  end  of  the  second  year 
the  contract  has  cost  $120,000  and  is  not  yet  finished,  you  know 
that  you  are  faced  with  a  loss  of  $20,000  plus  the  amount  that 
it  will  take  to  complete.  Have  an  outside  estimate  made  of 
the  sum  necessary  to  complete.  Say  this  sum  is  $7,000.  Your 
contract  is  worth  $100,000,  less  the  $7,000  to  finish  it  and  you 
have  already  lost  $20,000.  Therefore  appraise  jour  contract 
as  an  asset  at  $93,000  and  charge  off  $27,000  as  a  loss. 

In  large  operations  a  safe  practice  is  to  divide  the  job  into 
sections  according  to  the  original  bid.  Then  provide  "progress 
sheets"  for  each  section  with  the  estimated  cost  thereon;  as 
the  work  goes  forward,  transfer  the  costs  to  the  progress  sheet 
and  thus  keep  a  continuous  tally  between  the  actual  and  the 
estimated  cost. 


152  BUSINESS  ACCOUNTANCY 

Finished  Goods.  Here  again  we  cannot  have  accuracy 
without  a  cost  system.  It  may  seem  to  the  reader  that  I  am 
harping  too  much  on  cost  accounting,  but  my  experience  teaches 
me  that  good  business  is  impossible  without  exact  cost  finding 
and  that  approximation,  however  skilful,  is  dangerous  to  profits, 
but  experience  has  established  the  importance  of  a  cost  system. 

The  common  method  of  estimating  the  value  of  finished  goods 
is  by  reference  to  the  price  that  they  will  bring.  They  should  not, 
however,  be  priced  at  what  they  are  expected  to  sell  for,  because 
they  are  not  yet  sold  and  the  market  may  change  before  they 
are  sold.  If  put  in  at  the  selling  price,  a  false  profit  is  created. 
If  you  have  not  a  cost  system,  try  to  discover  as  best  you  can 
what  the  goods  actually  cost  you  to  put  into  the  finished  con- 
dition. It  is  quite  useless  to  give  rules  of  procedure  here,  for 
they  are  more  difficult  to  apply  than  is  a  cost  system  to  create, 
and,  in  the  end,  are  only  misleading. 

Finding  the  Profit.  We  have  now  the  inventory  figures 
in  hand.  What  shall  be  done  with  them?  Take  up  again  the 
fortunes  of  the  Specialty  Company.  Its  inventory  has  been 
taken  and  the  following  figures  found: 

Materials  and  supplies $  2,480.00 

Goods  in  process  of  manufacture 4,320.00 

Finished  goods 3,600.00 

Unused  advertising  material 250.00 

Office  supplies 126.50 

$10,776.50 

or  a  total  of  $10,776.50  of  the  materials  and  supplies  originally 
purchased  and  the  expenses  incurred.  Besides  that  we  learn 
that  $49.16  of  the  interest  paid  was  paid  in  advance  for  the  loan 
that  still  has  some  time  to  run.  So  we  take  the  $26,252.59  of 
materials  and  supplies  purchased  and  expenses  incurred;  first 
deduct  the  $49.16  interest  prepaid,  leaving  $26,203.43  and  from 
that  sum  deduct  the  $10,776.50  representing  the  goods  which 
we  still  have  on  hand.  The  residue  is  $15,426.93;  and  that  is 
the  value  of  the  goods  we  have  shipped  and  for  which  we  have 
received  (or  are  to  receive)  $18,017.75.  Therefore  a  trading 
profit  of  $2,590.82  has  been  made. 

Later  in  the  detailed  statement  it  will  be  found  that  $191.34 
of  cash  discounts  have  been  earned,  resulting  in  an  ultimate 
profit  of  $2,782.16.  We  are  mentioning  the  ultimate  figure 
merely  so  that  the  reader  will  be  able  to  identify  it  later. 


CLOSING  THE  BOOKS  153 

The  profit  has  been  ascertained  through  the  taking  of  an 
inventory — through  the  supplementing  of  the  books  by  figures 
which  did  not  appear  on  them.  It  has  been  a  backward  traveling 
process  and,  without  counting  up  what  we  had  on  hand,  we 
could  not  have  found  out  profits.  But  suppose  a  cost 
system  had  been  in  use. 

Illustrating  the  Point.  To  illustrate  the  difference  let  us 
go  through  the  same  transaction  on  the  assumption  that  the 
Specialty  Company  possesses  a  cost  system. 

First,  we  should  have  made  entries  recording  the  purchase 
of  materials  and  supplies,  the  payment  of  labor,  and  the  ex- 
penditures for  the  interest,  the  total  aggregating  the  already 
mentioned  figure  of  $26,203.43.  The  process  would  parallel 
that  already  followed.  But  we  should  not  have  to  take  a  phys- 
ical inventory  to  discover  what  we  had  on  hand.  Under  a  cost 
system  we  should  always  know  the  cost  of  the  goods  sold,  for 
we  should  have  the  costs  of  each  item  as  the  process  of  manu- 
facture went  forward;  the  materials  and  supplies,  labor,  expense, 
and  so  forth,  used  therein  would  have  been  deducted  from  time 
to  time  from  the  accounts  recording  them  and  have  passed 
into  an  account  termed  "cost  of  goods  sold." 

At  the  end  of  the  period  this  account  would  amount  to 
$15,426.93.  Deduct  that  figure  from  the  sales  of  $18,017.75 
and  we  have  a  trading  profit  of  $2,590.82,  which,  when  added  to 
our  miscellaneous  income  of  $191.34  gives  us  the  same  profit 
shown  by  the  other  process — $2,782.16;  or  deduct  the  $15,- 
426.93  cost  of  goods  sold  from  the  purchases  and  expenses 
amounting  to  $26,203.43  and  we  have  the  same  total  inventory 
secured  before — $10,776.50 — without  the  trouble  of   counting. 

Moreover,  because  the  account  termed  "cost  of  goods  sold" 
accumulated  as  rapidly  as  the  sales  in  the  sales  account,  the 
inventory — and  therefore  the  company's  condition — could  have 
been  ascertained  at  any  date  desired.  In  showing  the  two  plans 
we  are  anticipating  our  later  story  of  costs  and  how  they  are 
obtained. 

We  will  first  show  how  the  books  are  closed  and  how  a  state- 
ment is  prepared  in  the  more  primitive  fashion — beyond  which 
many  will  not  want  to  travel — and  we  will  later  demonstrate 
how  the  already  existing  methods  can  be  added  to  and  made 
immensely  more  valuable  by  the  addition  of  a  cost  system,  be 
the  business  trading,  jobbing,  or  manufacturing. 


154  BUSINESS  ACCOUNTANCY 

From  the  preceding  it  has  been  noted  that  the  Specialty 
Company,  with  its  present  books,  cannot  ascertain  its  condition 
without  taking  an  actual  and  physical  count  of  stock. 

Closing  Entries.  The  inventory  of  the  Specialty  Company 
reveals  the  figures  we  have  mentioned,  but  which,  to  make  the 
explanation  clear,  are  again  given: 

Materials  and  supplies $  2,480.00 

Goods  in  process  of  manufacture 4,320.00 

Finished  goods 3,600.00 

Unused  advertising  material 250.00 

Office  supplies 126.50 

Total $10,776.50 

A  search  of  the  trial  balance  taken  June  30  and  appearing  at 
the  end  of  Chapter  VIII  will  not  reveal  any  of  these  figures. 
Obviously,  they  must  be  put  on  the  books.  So,  as  a  step  in 
closing,  we  make  the  following  journal  entries : 

Dr.  Cost  of  goods  sold $25,694.25 

Cr.  Materials  and  supplies $14,830.00 

Payroll 8,404.25 

Expense 2,460.00 

There  is  no  immediate  connection  between  the  preceding 
and  the  inventories;  the  entries  are  made  because  the  accounts 
no  longer  represent  anything  except  a  history  of  the  cause  of 
certain  disbursements;  the  various  items  have  long  since, 
through  the  processes  of  manufacture,  become  merged  in  goods 
in  process  or  finished  stock.  For  that  reason  all  the  accounts 
pertaining  to  the  product  are  merged  under  the  title  "cost  of 
goods  sold."  This  title,  of  course,  is  premature,  for  all  of  the 
goods  have  not  been  sold. 

The  next  entry  provides  the  connection,  because  such  goods 
as  are  still  on  hand  are  taken  out  of  the  account  and  placed  in 
separate  inventory  accounts  to  inform  us  of  those  goods  we  still 
have  to  correct  the  "cost  of  goods  sold"  account  so  that  it  truly 
tells  the  cost  of  the  product  shipped. 

Dr.  Inventories: 

Materials  and  supplies $2,480.00 

Goods  in  process 4,320.00 

Finished  goods 3,600.00 

Advertising  material 250.00 

Office  supplies 126.50 

Cr.  Cost  of  goods  sold $10,776.50 


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1 

FORMS  58  and  59:     The  term  "profit  and  loss" 
is  sometimes  confusing.     It  is  better  expressed  by 
the  English  term  "profit  or  gain."     It  is  arrived 
at  after  the  trial  balance  has  been  made  by  listing 
the  various  accounts  on  a  sheet  such  aa  those 
shown  on  the  three  inserts  in  thU  section. 

_ 

li— 1 

UlLJU 

■ 

c 


CLOSING  THE  BOOKS  155 

We  have  also  at  this  time  discovered  that  we  have  prepaid 
interest  on  our  notes  to  the  extent  of  $49.16.  The  prepaid 
amount  is  in  the  nature  of  an  inventory  value  because  we  have 
not  actually  used  the  interest,  which  covers  a  future  period.  We 
make  an  entry  treating  the  item  as  though  it  were  an  inventory: 

Dr.  Prepaid  interest $49.16 

Cr.  Interest $49.16 

We  have  recorded  the  result  of  our  physical  inventory  and 
are  ready  to  close  the  books  and  prepare  our  statements.  To  do 
so  we  must  ascertain  what  belongs  to  the  profit  and  loss  account 
and  what  to  the  account  of  assets  and  liabilities. 

The  term  "profit  and  loss"  is  confusing.  It  is  really  " profit 
or  loss"  and  is  better  expressed  in  the  English  form  "loss  or 
gain."  It  is  the  haven  for  the  operating  accounts — for  the 
money  which  has  been  paid  out  of  the  business  and  is  no  longer 
represented  by  an  asset  of  a  form  corresponding  to  the  entry. 
For  instance,  labor  is  not  still  in  the  business  as  such,  neither 
are  used  materials  or  supplies.  The  definition  is  more  formidable 
than  the  actual  working  of  the  account  in  practice. 

Having  arrived  at  the  trial  balance,  which  is  merely  a  listing 
of  all  the  items  of  the  business  under  their  appropriate  heads, 
we  begin  to  distinguish  between  the  operating  accounts  (the 
profit  and  loss)  and  the  assets  and  liabilities.  The  first  gives 
us  the  statement  of  operation,  the  second  the  statement  of  con- 
dition. The  working  sheets  to  ascertain  these  results  are  in- 
valuable. They  are  shown  in  Forms  56  to  59  inclusive,  and 
reproduced  on  Inserts  IV,  V,  and  VI. 


CHAPTER  X 

HOW  TO  ARRIVE  AT  YOUR  STATEMENT 
OF  CONDITION 

AT  the  close  of  the  fiscal  period  of  any  business  (usually  a 
A\  year)  comes  the  preparation  of  the  "statement  of  condi- 
tion";  or  the  representation  in  abstract  form  of  the 
financial  worth  of  the  business  institution.  It  is  at  this  point 
that  the  individual,  partnership,  or  corporation  determines  an 
exact  standing  in  the  commercial  world  by  translating  all  of  the 
assets  and  liabilities  into  dollars  and  cents  and  exhibiting  them 
generally — though  not  necessarily — in  parallel  columns  to  dis- 
close the  net  worth.  Because  the  two  sides  of  the  account  must 
balance,  the  statement  was  formerly  termed  a  "balance  sheet," 
but  the  best  title — the  title  that  really  denotes  the  reason  for 
being — is  "statement  of  condition." 

What  Purposes  the  Statement  Serves.  Such  a  state- 
ment is  essential  to  good  business.  During  part  of  the  year 
many  items  of  profit  or  loss  must,  of  necessity,  remain  more  or 
less  undefined;  the  statement  of  condition  drives  away  all  the 
mists  and  exhibits  the  concern  in  its  actual  condition,  so  that  it 
may  be  studied  with  precision.  It  is  the  starting  point  for  almost 
every  business  extension,  for  every  important  business  step; 
it  is  required  as  a  basis  for  banking  and  often  for  mercantile 
credit  of  a  current  nature;  it  is  essential  when  new  financing 
is  to  be  made  and  it  should  always  be  on  view  before  either 
individual  or  corporate  profits  are  determined  or  paid.  It  is 
the  character  certificate  of  a  business. 

Because  "statement  of  condition"  is  a  somewhat  formidable 
phrase  and  the  proceeding  to  obtain  one  may  seem  to  demand 
the  training  of  an  accountant,  the  small  business  does  not  often 
so  check  up,  and  possibly  that  may  be  one  of  the  reasons  why  the 
small  venture  so  often  fails.  Regardless  of  size,  every  business 
should  pause  at  stated  intervals  and  take  account  of  itself — pull 
in  all  the  loose  ends  and  see  how  things  size  up.    The  task  is 

156 


YOUR  STATEMENT  OF  CONDITION  157 

simple  or  complex  according  to  the  nature  and  the  size  of  the 
concern,  but  it  will  never  be  a  job  of  appalling  magnitude  unless 
proper  accounting  has  been  grossly  neglected. 

Neglect  of  Statement  Grounds  for  Suspicion.  When  the 
preparation  of  a  statement  of  condition  is  neglected,  the  natural 
and  usually  justifiable  suspicion  arises  that  the  business  affairs 
will  not  bear  scrutiny.  Sometimes  the  real  condition  is  not 
arrived  at  because  of  sheer  negligence,  but  often  those  in  control 
of  a  concern  know  that  their  books  will  not  bear  inspection, 
and  they  avoid  a  knowledge  of  the  exact  truth  either  for  them- 
selves or  for  their  creditors. 

Here  is  one  of  the  worst  cases  which  I  have  ever  met.  A 
company  wanted  to  know  privately  what  an  audit  would  show — 
they  wanted  an  examination  which  would  warn  them  what  to 
expect  in  an  audit  which  had  been  asked  by  promoters  prior  to 
a  merger.  I  made  the  examination.  The  books  were  grossly 
incorrect  in  nearly  every  important  particular.  In  the  physical 
inventory  were  retained  buildings  and  machinery  which  had 
been  torn  down  or  taken  away  years  before;  depreciation  had 
been  limited  to  two  very  prosperous  years. 

As  far  as  I  could  discover,  the  treasurer  had  never  classed 
an  account  as  bad;  there  were  unpaid  accounts  four  and  five 
years  old,  and,  on  all  the  accounts  on  the  books,  correspondence 
with  the  supposed  debtors  disclosed  that  about  90%  refused 
payment,  claiming  that  the  bills  had  been  rendered  for  work 
which  should  have  been  included  under  original  contracts.  I 
had  to  subtract  some  30%  from  the  plant  and  equipment  item 
and  wipe  out  nearly  all  the  accounts  receivable.  The  assets 
shrunk  to  but  a  shadow  of  their  former  robust  selves,  but  what 
they  lost  was  well  made  up  on  the  accounts  payable!  These 
were  quite  few  in  number  and  I  was  not  surprised  to  learn  that 
the  bookkeeper  never  entered  an  account  as  payable  until  after 
it  has  been  paid.  I  wrote  to  all  the  men  with  whom  the  concern 
had  dealt  and  an  avalanche  of  bills  came  rushing  in.  The 
accounts  which  they  had  not  listed,  amounted  to  nearly  twice 
the  entire  value  of  the  assets;  the  company  was  insolvent. 

Were  they  grateful  for  the  report?  Not  at  all;  they  locked 
it  securely  in  the  safe  and  went  merrily  on  with  their  affairs 
until  some  creditor  forced  them  into  bankruptcy.  The  officers 
escaped  criminal  prosecution  only  because  the  creditors  were  so 
disgusted  that  they  did  not  care  further  to  bother  with  the  crew. 


158  BUSINESS  ACCOUNTANCY 

The  concern  which  makes  out  an  honest  statement  of  condi- 
tion at  the  end  of  each  fiscal  period  will  never  deceive  itself  and 
will  have  always  at  hand  the  facts  for  such  statements  as  banks 
and  merchandise  creditors  desire.  True  statements  are  the  best 
possible  introduction  to  a  bank — they  are  an  assurance  of 
intelligent  business  methods. 

The  Form  of  the  Statement.  A  certain  amount  of  con- 
vention exists  as  to  the  form  which  statement  of  condition 
should  take.  The  usual  form,  and  it  is  recommended,  is  Form 
60,  shown  on  Insert  VII.  It  is  not  the  best  from  several  stand- 
points, but  it  is  in  such  general  use  that  it  is  not  wise  to  depart 
far  from  it.  Bankers  and  credit  men  know  this  form;  the  frequent 
totals  of  divisions  of  the  assets  and  liabilities  permit  of  quick 
comparisons  between  related  items  by  the  skilled  credit  investi- 
gator. Any  other  form,  even  if  in  itself  more  desirable,  would 
be  less  effective  because  it  would  call  for  questions  from  the  man 
who  likes  to  see  things  at  a  glance. 

The  presented  form  is  designed  for  a  corporation  because 
most  business  is  done  under  the  corporate  form.  For  an 
individual  or  a  partnership  there  are  no  changes  on  the  asset 
side  except  that  the  head  "treasury  holdings"  is  stricken  out 
for  the  reason  that  this  item  contains  only  the  stock  of  the 
corporation  itself,  while  an  individual  or  a  partnership  does  not 
issue  stock.  On  the  liability  side  the  heading  changes  from 
"capital,  surplus,  and  liabilities"  to  "capital  and  liabilities." 
All  of  the  items  relating  to  the  capital  stock  come  out,  and  in 
their  place  are  listed  the  names  of  the  partners  with  their  original 
contributions  plus  such  accretions  as  they  have  added  from  the 
profits  and  a  new  item  termed  "undivided  profits"  which  repre- 
sents the  profits  that  have  been  earned  but  not  yet  apportioned, 
and  hence  are  temporarily  suspended  in  this  account.  The 
surplus  account  is  of  course  eliminated.  All  the  other  heads 
for  an  individual  or  a  partnership  follow  those  of  a  corporation. 

The  statement  of  condition  is  a  summary;  it  is  well  to  supple- 
ment it  by  schedules  giving  in  detail  the  composition  of  each 
item  so  that  the  further  study  provoked  by  an  examination  of 
the  sheet  may  have  the  minute  facts  on  which  to  work.  In  the 
present  chapter  the  proper  make-up  of  each  item  will  be  dis- 
cussed with  relation  to  the  summary  sheet. 

The  steps  preliminary  to  making  up  the  statement  of  condi- 
tion were  discussed  in  the  chapter  on  "Balancing  the  Books." 


INSERT  VII 

FORM  60,  described  on  page  158 


STATEMENT    OF    CONDITION 


ASSETS 


PITA  L,    SURPLUS      AND     LIABILITI 


give 


the  e 

eciatl 


should 


but 


advisable 

refer 
balance  sheet.  De- 
ri the  face  hereof, 
et  figure  only  to 


shown, 

TOTAL  PLANT  AND  EQUIPMENT 

GOODWILL : 

TREASURY  HOLDINGS: 

List  all  of  company's  own  stocks  and  bonda  which 
may  have  been  actually   issued  and  returned  to   the 

TOTAL  TREASURY  HOLDINGS 

SECURITIES  OWNED: 

List  all  securities  owned  and  held  aa  investment 
If  there  are  a  great  number,  schedule  the  details 
and   refer   to    schedule  number  on   this   aheet, 

TOTAL   SECURITIES  OWNED 

SINKING  FUND: 

Ll3t  such  funds  as  have  been  set  aside  in  accord- 
ance  with  the  provision  of  any  outstanding  mort- 
gages. If  mortgages  exist,  ascertain  if  the  pro- 
vision of   a   sinking  fund    is  demanded   therein. 

TOTAL  SINKING  FUND 

INVENTORY  AND  CURRENT  ASSETS: 
INVENTORY: 

Summarize   inventory  valuations.. 

TOTAL   INVENTORY 

CURRENT  ASSETS: 

Include  such  accounts  as  Cash,    Accounts  Re- 
ceivable  and  other  current    items. 

TOTAL   CURRENT   ASSETS 

TOTAL    INVENTORY   AND   CURRENT   ASSETS 

DEFERRED   ASSETS: 

List   such    items   as  cash  surrender  value  of  life 
insurance  policies,    probable  return  on  mutual 
fire    insurance  policies     and   ao    forth. 

TOTAL  DEFERRED  ASSETS 

PREPAID  OPERATING    EXPENSES: 

List  unexpired  inBurance.  prepaid  interest,  ad- 
vances to    agents,    prepaid    royalty,    and  so    forth. 

TOTAL  PREPAID  OPERATING   EXPENSES 


CAPITAL: 
PREFERRED: 
Authorized 


TOTAL  CAPITAL   STOCK  ISSUED 


Second  Mortgage  — perce: 

Authorized 

Other   issues   if  they   exist 

TOTAL  BONDED    INDEBTEDNESS 

CURRENT  LIABILITIES: 


liabilities   including 


TOTAL  CURRENT  LIABILITIES 

RESERVES: 

List   reserves    set   aside  other   than  depreciation 
in  plant   and  equipment,    and  Accounts  Receivable., 

total  reserves 
surplus: 

Eliminate  all  possible  detail  from  this  account 
on  balance  sheet.  In  presenting  a  Statement  of 
Operations,  whenever  it  can  be  done,  show  at  the 
of  the  statement  the  surplus  at  the  begin- 


and 


nd  of 


thi 


rations  together 
the  only  figure 


FORM  60:  This  is'the  customary  form  a  statement  of 
condition  appears  in.  It  has  been  used  for  years  and  has 
become  well  established.  Many  accountants  and  bankers 
agree  that  in  some  respects  it  could  be  improved  upon, but 
it  is  questionable  whether  or  not  a  departure  from  this 
form  would  be  wise,  inasmuch  as  the  majority  cf  bankers 
and  credit  men  are  so  very  familiar  with  its  classifications 
and  totals.  The  procedure  for  arriving  at  the  totals  and 
the  various  classifications  are  fully  explained  in  this  chapter. 


TOTAL      ASSETS 


TOTAL   CAPITAL,    SURPLUS   AND  LIABILITIES 


YOUR  STATEMENT  OF  CONDITION  159 

Dividing  the  Assets.  The  entirety  of  the  assets  is 
broadly  divided  into  "quick"  or  "current"  and  "fixed"  assets 
and  the  liabilities  into  "current"  and  "fixed."  It  is  important 
to  keep  these  distinctions  in  mind  because  much  of  the  credit 
(and  therefore  much  of  the  success,  for  credit  is  based  only  on 
the  actuarial  calculations  of  success)  depends  upon  the  relations 
between  these  various  classes  of  assets  and  liabilities.  The 
limits  of  the  items  cannot  be  set  by  definitions  which  will  cover 
all  cases;  as  in  all  accountancy  affairs,  the  rule  is  to  use  common 
sense  under  the  circumstances,  but  the  general,  guiding  defini- 
tions are  these: 

"Fixed  assets"  are  those  properties  which  have  been  bought 
for  future  operation  of  the  business  and  which  will  not  be  dis- 
posed of  while  the  business  is  operated.  An  obvious  exception 
is  the  disposal  of  wornout  or  obsolete  machinery. 

"Quick  assets"  are  that  part  of  the  capital  which  is  fluid  and 
which  travels  in  the  business  cycle  of  (1)  cash,  (2)  the  exchange 
of  cash  for  materials,  labor  and  so  on,  (3)  the  exchange  of  the 
results  of  the  preceding  exchange  for  accounts  receivable  and, 
(4)  the  exchange  of  accounts  receivable  for  cash.  It  is  to  be 
expected  that,  should  the  business  stop  operations  at  any  time, 
the  cycle  will  complete  itself. 

"Fixed  liabilities"  are  determined  by  the  element  of  time  in 
their  payment  which  takes  them  out  of  the  cycle  of  business, 
such  as  mortgages  and  other  stated  obligations  of  long  time  and 
which  are  generally  secured  by  the  "fixed  assets." 

"Current  liabilities"  are  the  liabilities  which  flow  from  the 
operation  of  the  cycle  described  under  "quick  assets." 

Fixed  Assets.  The  fixed  assets  are  generally  the  real 
estate,  buildings,  machinery  and  other  property  which  go  to 
make  up  the  equipment  for  doing  business.  They  cannot  readily 
be  removed,  and  were  they  removed,  might  have  practically  no 
value  except  as  scrap.  The  land  value  is  fixed,  insofar  as  appre- 
ciation may  acrue,  by  location.  Likewise,  the  buildings  may  be 
adaptable  to  one  line  of  business  and  to  no  other. 

Machinery  and  equipment  are  also  dependent  for  value 
upon  the  nature  of  the  business.  But  the  figures  to  be  used  in 
the  statement  are  not  the  forced  sale  prices,  for  the  statement  is 
presumably  that  of  a  going  business  and  not  of  an  odd  lot  of 
equipment  offered  at  auction;  therefore  it  is  proper  to  use  original 
costs  less  the  depreciation  through  wear  and  tear  or  obsolescence. 


100 


BUSINESS  ACCOUNTANCY 


This  subject  is  more  fully  treated  in  the  chapter  on  deprecia- 
tion. The  best  practice  is  to  inventory  the  real  estate  and 
equipment  at  cost  and  set  up  a  reserve  against  depreciation. 
The  net  figure  should  be  carried  out  in  the  last  column,  but 
under  no  circumstances  should  the  reserve  first  be  deducted  and 
only  the  net  shown.  The  sheet  should  carry  the  original  cost  as 
well  as  the  depreciation.  When  credits  to  these  accounts  arise 
through  the  sale  of  property  or  equipment,  the  credit  or  credits 
should  be  made  to  agree  with  the  original  charge  or  the  pro- 
portion of  the  charge  carried  by  the  article  sold. 

The  Depreciation  Reserve.  Where  a  reserve  has  been 
created  to  provide  for  depreciation  and  a  certain  amount  of  that 
depreciation  carries  the  particular  item  being  sold  or  disposed 
of,  the  proper  procedure  is  to  take  out  of  the  reserve  the  pro- 
portion applicable  to  the  article  and  set  aside  during  the  previous 
years'  operations,  and  if  the  amount  so  reserved  is  not  sufficient 
to  provide  for  the  loss  sustained  through  the  disposal  of  the 
article,  the  difference  should  be  charged  directly  against  the 
accumulated  surplus  as  a  loss.  Thus  the  credit  entry  is  the 
total  cost  of  the  article  which  is  deducted  from  that  section  of 
the  property,  plant  and  equipment,  while  the  debits  vary  in 
accordance  with  the  circumstances. 

To  illustrate:  A  company  possesses  two  motor  trucks  which 
cost  $3,000  each.  They  are  entered  at  cost  and  are  posted  to  a 
ledger  account  finally  appearing  as  in  Form  61. 


(Ledger)                Trucking  Equipment 

Date 
1915 

Items 

Fol. 

Debit 

Date  I   Items 

Fol. 

Credit 

July 

■ 

1 
6 

1  Motor  Truck 
1  Motor  Truck 

3 
3 

000 
000 

00 
00 

Form 

61 

1 

(Ledger) 


Date 


— M 

Form  62  I 


Reserve  for  Depreciation  of  Trucking  Equipment 


Items 


IFol. 


Debit 


Credit 


June 


June 


YOUR  STATEMENT  OF  CONDITION 


181 


In  the  course  of  two  years  the  trucks  have  been  depreciated 
at  the  rate  of  15%  a  year  and  in  a  separate  account,  preferably  on 
the  page  opposite  so  that  one  glance  will  bring  all  related  infor- 
mation to  hand,  as  in  Form  62. 

At  the  end  of  two  years  the  trucks  are  carried  at  a  cost  of 
$6,000  less  a  reserve  of  $1,800— a  net  value  of  $4,200  or  $2,100 
each.  But,  instead  of  confusing  all  the  entries  in  one  account, 
we  continue  through  future  years  to  know  our  original  costs — 
of  great  value  in  the  event  of  fire  or  sale — and  at  the  same  time 
are  conservatively  providing  for  depreciation.  At  the  end  of 
two  years  we  shall  suppose  that  a  chance  is  offered  to  sell  one 
of  the  trucks;  we  have  been  in  need  of  a  larger  truck  and  therefore 
take  the  opportunity.  But  the  driver  has  been  reckless  and  the 
truck  sold  has  been  abused  so  that  the  highest  price  obtainable 
is  $1,500;  the  depreciation  has  been  insufficient.  The  following 
entry  is  required;  it  is  shown  through  the  journal  merely  to 
display  the  proper  credits  and  debits,  but  it  can  be  made  through 
the  cash  book  or  any  one  of  a  number  of  books  (Form  63) : 

The  posting  of  the  entries  will  result  in  the  ledger  accounts, 
as  shown  in  Forms  64  and  65. 


Journal 

Date 
1917 

Debit 

Credit 

July 

3 

Reserve   for  Depreciation  of  Trucking 

Equipment 

Surplus  or  Undivided  Profit 
Cash 

Trucking  Equipment 

(Sale  of  one  of  our  trucks  at  a  loss) 

1 

900 
600 

500 

00 

00 
00 

3 

000 

00 

Form 

63 

(Ledger)                                        Trucking  Equipment 

Date 
1915 

Items 

Fol. 

Debit 

Date 
1917 

Items 

Fol. 

Credit 

July 
a 

191 
Aug. 

1 
6 

7 
1 

1  Motor  Truck 
1  Motor  Truok 

Balance 

3 

3 

000 
000 

00 
00 

July 

■ 

3 
31 

8old  1 

Truck 

Balance 

3 
3 

000 
000 

00 

00 

6 

000 

00 

6 

000 

00 

3 

000 

00 

Form 

64 

n  . 

162 


BUSINESS  ACCOUNTANCY 


(Ledger) 


Reserve  for  Depreciation  of  Trucking  Equipment 


Form  65 


The  accounts  now  show  one  truck  at  cost  and  a  reserve  for 
one  truck.  The  sum  of  SI, 500  has  also  been  added  to  the 
cash  account  and  a  loss  of  S600  deducted  from  the  undivided 
profit  or  surplus. 

It  is  not  sound  practice  to  appreciate  as  well  as  depreciate 
even  though  there  be  excellent  ground  for  holding  that  land, 
buildings,  and  equipment  are  presently  worth  more  than  they 
cost.  A  realization  that  the  realty  is  being  carried  too  low  is  so 
often  the  contemporary  of  a  bad  loss  which  needs  covering  that 
the  whole  practice  of  appreciation  is  open  to  suspicion,  and  it  is 
a  poor  policy  to  pursue  unless  such  appreciation  can  be  sub- 
stantiated in  fact  by  an  independent  appraisal. 

It  is  commonly  discovered  in  the  records  of  most  failing 
organizations  that  with  each  succeeding  year  of  disaster,  a  sub- 
stantial amount  is  tacked  on  to  the  value  of  the  realty.  There 
are  many  flagrant  cases  of  this.  I  recall  one  in  particular,  where 
during  three  years  immediately  preceding  a  receivership  the 
value  of  the  land  increased  from  $200,000  to  §700,000,  although 
no  sale  of  land  had  been  made  in  that  vicinity  during  nearly 
10  years! 

Property  rights,  such  as  mines,  lumber  tracts,  and  the  like, 
whether  held  on  lease  or  in  fee,  depend  for  value,  when  held  in 
fee,  on  the  product  remaining;  and  when  leased,  on  the  product 
remaining  and  the  terms  of  the  lease.  Hence  the  book  value 
should  be  depreciated  or  amortized  in  accordance  with  the 
production  and  the  license  stipulations. 

Good  will  is  so  important  and  sometimes  so  baffling  an  asset 
that  a  chapter  is  later  devoted  to  it  alone. 

Treasury  Holdings.  Capital  stock  becomes  a  "treasury 
holding"  after  it  has  been  issued  for  value  received  such  as 
cash,  a  physical  asset,  general  services,  good  will,  or  any  other 


YOUR  STATEMENT  OF  CONDITION  163 

legal  consideration,  and  is  afterwards  donated  to  the  company, 
the  grantor  parting  with  every  vestige  of  title.  This  stock  is  then 
technically  known  as  " treasury  stock"  and  may  be  disposed  of 
as  the  company  desires.  If  a  company  repurchases  its  own 
stock,  this  is  also  known  as  "treasury  stock" — the  operation 
being  the  same  in  theory  as  in  the  acquisition  by  gift;  there  is 
statutory  limitation  upon  the  purchase  by  a  company  of  its  own 
stock.  Of  course,  stock  that  has  been  canceled  is  not  a  holding. 
Bonds  are  treasury  holdings  only  while  they  are  legal  obligations 
to  pay;  canceled  bonds  are  not  obligations  to  pay  and  are  not, 
when  taken  back,  assets. 

The  company's  securities  placed  in  the  treasury  should  be 
inventoried  at  par,  except  in  the  case  of  stock  repurchased  which 
is  carried  at  the  purchase  price;  not,  however,  at  a  figure  exceed- 
ing its  proportion  of  the  company's  net  worth — it  is  not  proper 
to  take  the  market  value  which  might  have  been  paid  if  that 
market  value  be  sentimental  or  founded  on  a  speculative  con- 
sideration. When  preparing  a  statement  of  condition  a  list  of 
all  the  stock  or  bonds  which  have  been  issued  and  returned  to 
the  treasury  should  supplement,  as  a  supporting  detail,  the 
amount  contained  in  the  statement. 

Securities  Owned.  The  investments  in  outside  securities 
are  grouped  under  this  head  as  distinguished  from  the  preceding 
classification  which  includes  only  those  of  the  company  itself. 

The  securities  may  be  of  any  nature  other  than  current  or 
demand  loans,  except  in  those  corporations  whose  investments 
are  regulated  by  law.  If  the  number  be  large  they  should  be 
set  out  in  detail  in  a  separate  schedule.  The  securities  in  this 
section  may  be  carried  without  relation  to  their  par  value,  and 
it  is  recommended  that  two  entries  of  valuation  be  made  for 
each  security:  (1)  book  value  and  (2)  market  value.  Then  if 
the  market  value  be  less  than  the  book  value,  a  reserve  may  be 
set  up  aside  to  cover  the  difference,  so  that  the  temporarily  false 
values  of  the  books  may  not  inflate  the  net  worth.  The  pre- 
sumption is  that  the  company  has  bought  or  taken  only  good 
securities  and  the  bookkeeping  is  done  on  that  basis  with  the 
exceptions  taken  care  of  in  the  reserve. 

Stocks  are  very  seldom  amortized  except  with  the  idea  of 
bringing  down  an  excessive  premium  that  may  have  been  paid, 
so  that  in  the  course  of  a  few  years  the  income  derived  from  that 
stock  is  proportionate  with  the  value  carried  on  the  books. 


164  BUSINESS  ACCOUNTANCY 

With  bonds,  however,  the  premium  or  discount  is  amortized  for 
the  period  of  years  in  which  the  bond  or  bonds  have  to  run.  For 
instance,  a  New  York  state  1912  50-year  4%  Erie  Canal  bond 
sold  at  a  premium,  or  at  106.  Having  paid  a  premium  of  S6, 
the  actual  income  derived  is  not  4%,  but  a  figure  around  3.88%. 
Therefore,  in  computing  the  investment  company's  income, 
instead  of  getting  4%  on  the  Canal  bonds,  their  actual  income  is 
annually  S3. 88,  because  they  have  to  consider  the  amortization 
of  that  premium  for  the  balance  of  the  life  of  the  bond. 

Sinking  Funds.  A  sinking  fund  is  a  reserve  fund  set  aside 
at  stipulated  periods  toward  the  payment  of  funded  indebtedness 
at  its  maturity  or  maturities,  and  the  amount  of  the  payments 
are  calculated  to  exactly  equal  the  maturity  amount  of  the 
debt.  It  is  well  to  provide  sinking  funds  in  all  long-term  financing. 
If  the  sinking  fund  be  applied  periodically  to  the  purchase  and 
cancelation  of  the  bonds  for  which  it  was  provided,  thus  reducing 
the  actual  bonded  debt,  then  the  amount  of  the  bonds  so  retired 
should  be  deducted  from  the  original  sum  of  bonds  issued  which 
are  being  carried  on  the  liability  or  credit  side.  Otherwise  the 
bookkeeping  is  the  same  as  that  in  "securities  owned." 

A  sinking  fund  is  generally  placed  with  a  trustee  who  issues 
a  receipt  to  the  company  for  all  payments  made  to  the  account. 
It  is  especially  important  to  watch  for  any  negligence  which 
might  occur  in  not  living  up  to  the  sinking  fund  agreements 
and  not  trust  to  posterity  to  meet  the  issue  when  it  becomes 
due.  Many  mortgages  include  a  default  in  a  payment  to  the 
sinking  fund  in  the  same  class  with  a  default  in  interest. 

The  inventory  was  discussed  at  length  in  the  previous  chapter 
on  "Balancing  the  Books."  The  methods  of  taking  vary  tre- 
mendously, dependent  upon  the  nature  of  the  inventory;  the 
principal  point  is  to  obtain  a  correct  account,  not  getting  in 
more  than  actually  exists,  or  leaving  out  anything  which  properly 
should  be  included.  As  an  adjunct  to  the  inventory  there  may 
go  into  this  statement  what  is  known  as  a  consignment  account. 
The  consignment  account  represents  material  shipped  out,  not 
as  sold,  but  to  be  sold  by  the  person  who  receives  it ;  he  commonly 
has  no  obligation  to  pay  until  he  has  made  a  formal  sale  and  the 
title  to  the  goods  remains  in  the  sender  until  such  sale  and 
delivery  have  been  made.  Although  the  goods  remain  the 
property  of  the  sender  or  consignor  until  sold,  they  are  given  a 
separate  heading  on  the  statement  to  distinguish  them. 


YOUR  STATEMENT  OF  CONDITION  165 

Current  Assets.  Cash  includes  cash  in  a  bank  or  banks  and 
the  petty  or  other  cash  on  hand.  The  balance  as  shown  in  bank 
is  taken  from  the  company's  own  books  and  checked  up  with 
the  bank's  figures.  The  bank  balance  will  commonly  be  longer 
because  of  the  checks  which  have  not  yet  been  presented  for 
payment.  From  the  standpoint  of  the  draftsman  of  the 
statement,  each  check,  when  drawn,  is  considered  as  an  instant 
deduction  from  the  cash  balance  in  the  bank.  No  allowance  is 
made  for  delays  in  collection  in  most  cases,  although  a  few  con- 
cerns, whose  checks  are  usually  for  large  amounts,  have  bank 
arrangements  to  obtain  daily  all  the  canceled  checks.  They 
keep  their  own  account  and  the  bank  account  identical.  The  safe 
practice  is  to  consider  a  check  paid  at  the  same  moment  it  is 
drawn;  this  plan  is  practically  accurate  and  not  only  saves 
clerical  labor  but  may  also  save  overdrafts  and  the  habit  of 
drawing  checks  ahead  of  the  money  to  pay  them  with. 

The  Reasons  for  Petty  Cash.  Petty  cash  is  in  the  hands 
of  the  cashier  in  order  that  he  may  make  small  disbursements 
without  the  necessity  of  running  through  a  voucher  in  the 
ordinary  course  anal  possibly  delay  small,  needed  payments. 

Very  often  his  balance  is  only  partly  in  cash  and  the  balance 
is  in  memoranda  or  in  receipts  for  postage,  express  charges,  and 
the  like.  This  condition  should  not  exist  at  the  time  of  closing 
the  books;  the  charges  should  be  sent  through  in  order  that  they 
may  be  entered  and  the  cash  balance  restored.  In  not  a  few 
companies,  executives  and  employees  are  permitted  to  borrow 
from  the  cashier  on  I.  O.  U.  Such  a  practice  cannot  be  too 
strongly  condemned;  it  encourages  employees  to  spend  in  advance 
and  therefore  in  excess  of  their  incomes;  when  they  really  need 
money  they  can  be  better  cared  for  out  of  a  fund  provided  for 
the  purpose. 

The  abuse  of  petty  cash  by  executives  is  inexcusable;  the 
money  is  given  to  the  cashier  for  specific  purposes  and  among 
them  is  not  that  of  loaning  to  executives.  I  recall  a  case  in  the 
South  in  which  the  executives  were  in  the  habit  of  frequently 
taking  from  $5  to  $10  from  the  cashier,  sometimes  giving  a 
receipt  and  more  often  not;  it  was  simply,  "Give  me  $10  and 
charge  it  to  my  account." 

In  the  course  of  time  the  cashier  came  under  suspicion  for 
other  reasons  and  also  at  that  time  the  officers  discovered  that 
they  had  drawn  extraordinary  amounts  through  petty  cash.    It 


166  BUSINESS  ACCOUNTANCY 

could  not  be  proved  that  the  cashier  had  taken  the  money, 
for  none  of  the  executives  could  go  back  through  the  long  period 
covered  and  say  with  certainty  whether  he  had  or  had  not 
drawn  that  amount  on  that  particular  date.  They  all,  however, 
imagined  that  they  were  swindled  by  the  cashier;  probably 
they  were — but  it  was  their  own  fault. 

Personal  business  and  company  business  should  never  be 
confused;  personal  accounts  should  never  be  paid  b>  company 
check.  If  one  cannot  tend  to  his  own  affairs,  he  should  take  a 
clerk  away  from  other  work  long  enough  to  attend  to  it. 

How  Accounts  Receivable  Are  Shown.  Accounts  receiv- 
able are  shown  only  in  the  total  amount.  This  total  is  substan- 
tiated by  the  individual  detailed  accounts  expressing  every 
transaction  which  affect  the  debit  or  credit  of  the  controlling 
account.  The  total  of  these  accounts  must  always  agree  with 
the  total  of  the  controlling  account  as  shown  in  the  general 
ledger  and  on  this  statement.  The  detail  of  the  accounts  should 
be  attached  to  the  statement  in  schedules  with  divisions  according 
to  their  age — as  30,  60,  or  90  days.  If  the  number  of  accounts 
be  very  large,  then  of  necessity  only  the  summaries  can  be  given, 
but  these  should  be  divided  according  to  overdue  dates,  states, 
sections,  or  collection  districts. 

No  active  account  should  be  more  than  30  days  old  unless 
the  nature  of  the  business  be  such  that  the  customer's  as  well  as 
the  company's  financial  stability  permits  a  longer  dating.  Money 
tied  up  in  long  accounts  does  not  give  a  business  an  opportunity 
constantly  to  turn  over  its  capital  and  thus  slows  profits. 

The  average  business  man  does  not  seem  to  realize  that  a 
large  number  of  overdue  accounts  receivable  are  even  less 
desirable  than  a  large  amount  of  possibly  unsalable  stock.  If 
his  establishment  be  cluttered  with  old  stock,  he  is  very  apt  to 
make  some  sort  of  a  drive  on  its  reduction,  but  more  often  than 
not,  and  simply  through  lack  of  a  realization  of  their  importance, 
he  does  not  strive  to  turn  that  portion  of  his  stock  which  is  in 
the  hands  of  his  customers  and  is  represented  by  the  accounts 
receivable  items,  into  cash. 

If  a  schedule  be  prepared  along  the  lines  suggested,  it  will 
undoubtedly  appear  that  certain  accounts  are  of  doubtful 
collectability.  These  should  then  be  removed  from  the  general 
accounts  receivable  and  placed  in  a  new  account  created  to 
handle  doubtful  accounts. 


YOUR  STATEMENT  OF  CONDITION  167 

Accounts  Receivable  in  Suspense.  Such  accounts  as 
require  the  company  to  take  legal  steps  for  their  collection,  or 
accounts  which  are  doubtful  in  any  way,  should  be  so  transferred. 
There  should  be  no  self-deception  as  between  live  accounts 
receivable  and  doubtful  or  bad  accounts.  If,  at  the  end  of  the 
second  year,  any  items  in  the  suspended  account  have  not  been 
collected  or  settled,  they  should  be  taken  out  and  charged 
directly  to  profit  and  loss  unless  a  good  reason  to  the  contrary 
exists.  The  bookkeeping  transfer  of  doubtful  accounts  should 
not  be  a  sign  to  abandon  collection  or  to  give  them  up  as  eventual 
assets.  They  are  transferred  in  the  interest  of  accurate  book- 
keeping and  the  information  such  segregation  provides. 

Some  companies,  either  through  lack  of  sufficient  capital  or 
because  of  unusual  conditions,  may  be  called  upon  at  a  critical 
time  to  hypothecate  certain  of  their  accounts  receivable.  When 
accounts  are  thus  hypothecated,  they  should  be  taken  out  of 
the  general  accounts  receivable,  set  up  separately  and  supported 
in  detail  by  a  schedule.  A  statement  which  includes  accounts 
receivable  without  mention  of  their  hypothecation  is  not  an 
honest  statement. 

Notes  Receivable.  Notes  receivable  are  promises  to  pay, 
by  a  creditor,  either  on  demand  or  on  a  specified  date,  certain 
sums  of  money  for  which  value  has  been  received.  A  promissory 
note  has  no  higher  security — no  better  prospect  of  being  paid — 
than  the  account  for  which  it  was  given,  but  it  is  more  convenient 
than  an  open  account  in  the  case  of  litigation,  for  then,  instead 
of  the  creditor  being  required  to  prove  that  the  money  is  due, 
he  need  only  offer  the  note  in  evidence  and  all  the  burden  of 
proving  that  it  is  not  due  shifts  to  the  debtor.  Banks  will  dis- 
count such  notes  where  they  would  not  handle  the  open  accounts. 

The  general  procedure,  when  notes  are  discounted,  is  to  close 
out  of  notes  receivable  the  items  discounted.  This  does  not 
recognize  the  legal  liability  of  indorsers  and  is  improper.  The 
best  practice  is  to  open  another  account  termed  "  notes  receivable 
discounted"  and  credit  the  notes  to  that  when  the  cash  received 
is  debited.  The  showing  of  only  the  net  amount  due  to  notes 
receivable  is  proper  enough,  but  it  should  be  specified,  and 
preferably  on  the  face  of  the  statement  of  condition,  that  certain 
notes  have  been  discounted.  Notes  received  for  merchandise 
accounts  are  so  often  unpaid  that  the  contingent  liability  which 
arises  from  their  discount  should  not  be  disregarded. 


168  BUSINESS  ACCOUNTANCY 

Acceptances  have  been  previously  touched  on  (pages  126  to 
128).  They  should  be  carried  in  precisely  the  same  manner  as 
notes  receivable,  but  under  a  separate  head  of  "acceptances,"  for 
they  are  unquestionably  of  higher  value  than  the  ordinary  notes. 

Deferred  Assets.  The  name  explains  the  character  of  this 
asset — it  matures  in  the  future.  A  familiar  instance  is  the  mutual 
insurance  policy;  in  such  policies  the  contributions  are  made  for 
periods  of  usually  three  years  and  are  often  substantial.  At  the 
end  of  the  period  the  association  figures  out  the  amount  of  the 
losses,  prorates  the  contributions,  and  returns  the  balance  of 
the  deposits. 

It  is  seldom  that  less  than  85%  of  the  deposits  is  returned, 
and  the  contributing  company  can  always  count  upon  at  least  a 
portion  of  the  deposit  coming  back;  the  portion  which  is  likely  to 
be  returned  is  a  deferred  asset.  If  $10,000  has  been  deposited 
and  the  experience  of  former  years  has  been  that  $8,500  will  be 
returned,  the  contributor  is  safe  in  assuming  that  the  next 
period  will  give  the  same  return.  The  net  cost  for  three  years  is 
thus  $1,500;  this  is  distributed  at  $500  a  year  and  the  balance 
of  the  deposit  is  entered  as  a  deferred  asset. 

Of  course,  there  is  a  liability  to  contribute  beyond  the  original 
deposit,  but  that  contingency  is  most  remote  and  in  any  event 
the  reader  of  the  statement  can  take  into  mental  account  the 
possible  liability.  It  is  one  thing  to  put  a  false  asset  into  a 
statement  and  quite  another  to  put  in  one  which  in  human 
experience  is  a  safe  asset  and  which  by  the  very  form  of  its 
entry  advises  of  its  exact  nature.  Then,  if  one  liked,  one  can 
disregard  the  asset  in  forming  judgment  upon  the  condition  of 
the  enterprise. 

The  cash  surrender  value  of  life  insurance  policies  on  which 
the  premiums  are  paid  by  the  company  for  its  own  benefit,  as 
on  the  lives  of  certain  officers,  are  sometimes  classed  as  deferred 
assets,  but  I  regard  them  as  such  only  during  the  period  at  the 
beginning  of  the  policy  when  it  has  no  cash  surrender  value. 
Most  policies  stipulate  that  the  cash  surrender  value  will  not 
come  into  being  until  after  the  second  or  third  anniversary  of 
the  policy.  The  deferred  asset  is  present,  however,  even  if  it 
cannot  be  obtained  except  by  the  payment  of  additional 
premiums. 

Suppose  the  premiums  are  $400  a  year  and  the  cash  surrender 
value  after  the  third  year  is  $1,000;  say  that  two  premiums 


YOUR  STATEMENT  OF  CONDITION  169 

have  been  paid,  that  is  $800;  the  cash  surrender  value  can  be 
obtained  by  the  payment  of  another  $400.  The  amount  to  be 
placed  as  an  asset  is  therefore  $600,  being  the  $1,000  less  the 
$400  necessary  to  obtain  it.  When  the  period  of  the  policy  has 
arrived  that  brings  the  cash  surrender  value  into  being,  it  is 
no  longer  a  deferred  asset  but  is  practically  cash,  for  it  can  be 
obtained  at  any  time  and  usually  without  delay.  I  favor  the 
inclusion  of  a  distinct  item  between  the  "securities  owned"  and 
the ' '  inventory ' '  called ' '  cash  surrender  value  of  insurance  policies. ' ' 

Prepaid  Operating  Expenses.  Some  operating  charges 
must  be  paid  in  advance;  it  is  not  proper  to  put  the  burden  of 
these  expenses  upon  the  period  during  which  they  were  paid, 
since  they  are  not  expenses  of  that  period,  but  were  merely  paid 
during  that  period.  They  should  be  distributed  over  the  period 
which  they  benefit,  and  thus  arises  an  asset  for  the  unearned, 
portion  of  the  prepayment.  Familiar  cases  are  fire  insurance 
and  bank  discounts. 

Fire  insurance  premiums  are  assets  for  so  much  of  the  premium 
as  has  not  been  used  at  the  time  of  taking  the  statement.  The 
practice  is  to  divide  the  premium  by  the  number  of  months 
which  it  covers  and  carry  the  payment  as  an  asset  in  the  amount 
of  the  months  yet  to  run.  This  value  is  taken  because  all 
statement  of  condition  values  are  those  of  a  going  business, 
and  such  is  the  value  of  the  asset  to  the  going  business.  If  the 
policy  were  actually  canceled,  the  proportion  of  premiums 
returned  by  the  company  would  not  be  the  same  as  the  statement 
value;  for,  in  cancelation,  the  insurance  companies  apply  the 
"short  rate"  which  gives  a  smaller  return  than  the  calendar 
division  of  the  policy. 

Where  interest  is  paid  in  advance,  as  on  the  discount  of  a 
note,  the  statement  can  take  as  an  asset  the  proportion  of  the 
interest  paid  from  the  date  of  the  statement  to  the  maturity  of 
the  note. 

Advances  to  agents  are  in  part  a  prepaid  operating  charge 
but  all  advances  should  not  be  so  entered  pending  the  receipt  of 
specific  items  from  the  agent.  Much  of  the  advance  will  undoubt- 
edly go  to  selling  expense  in  the  final  disposition,  and,  therefore, 
if  the  item  be  set  up,  there  should  also  be  a  reserve  in  the  amount 
of  the  portion  of  the  advance  which,  at  the  date,  will  have  been, 
in  all  likelihood,  laid  out  for  eventual  expense  charges.  Other- 
wise much  of  the  asset  will  be  fictitious. 


170  BUSINESS  ACCOUNTANCY 

Few  companies  know  how  to  charge  their  organization 
expenses.  An  attempt  is  often  made  to  load  them  on  the  first 
year,  but  it  is  not  right  to  mar  the  initial  year  with  money 
outlays  which  are  designed  to  benefit  for  all  time.  Part  of  the 
organization  expense  is  prepaid  operating  cost  and  is  to  be 
apportioned  over  the  years  as  such.  The  number  of  years  through 
which  the  distribution  is  to  be  made  depends  upon  the  nature  of 
the  business;  and  much  the  same  policy  as  is  formulated  in  the 
subsequent  chapter  on  the  appraisal  of  good  will  is  applied  to 
distribution  of  organization  charges. 

Extensive  plant  reorganizations  along  lines  of  higher  efficiency 
are  to  be  treated  on  the  same  basis.  No  fixed  rules  can  be 
given;  the  estimate  should  be  the  period  over  which  the  benefit  is 
expected — within  reasonable  limits.  When  expenses  are  incurred 
incident  to  a  bond  issue,  it  is  proper  to  spread  them  over  the 
term  of  the  bonds;  if  incident  to  a  contract,  over  the  term  of 
the  contract.  In  the  ordinary  trading  or  manufacturing  com- 
pany, the  period  will  run  anywhere  from  two  to  five  years. 

I  distribute  over  five  years  in  the  case  of  a  fruit  preserving 
company,  for  the  experience  of  similar  companies  has  shown 
that  the  benefit  would  stand  for  at  least  that  term.  In  the  case 
of  a  manufacturer  of  automobile  parts  who  spent  more  than 
$300,000  in  rearrangements  on  an  efficiency  basis  and  thereby 
more  than  doubled  the  profits,  the  expense  was  apportioned 
through  three  years  although  all  the  changes  were  made  in  a 
single  year  and,  during  a  part  of  that  year,  owing  to  the  upset 
conditions,  money  was  actually  lost. 

Other  familiar  prepaid  operating  expenses  are  taxes,  prepaid 
advertising,  and  rent. 

Capital  Stock  and  Liabilities.  The  amount  of  capital 
stock  is  supposed  to  be  the  money  representation  of  the  fund 
which  the  company  is  using  for  the  promotion  of  its  business. 
It  in  a  measure  corresponds  to  the  personal  worth  or  credit  of 
the  individual,  and  it  has  been  defined,  as  a  matter  of 
law,  as  a  trust  fund  for  the  benefit  of  the  creditors,  that  is  to 
say,  a  creditor  in  dealing  with  a  corporation  is  entitled  to  assume 
that  its  assets  equal  at  least  the  face  value  of  the  capital  stock, 
and  that  these  assets  will  not  be  subject  to  more  than  the  ordinary 
hazards  of  business. 

The  theory  of  capital  stock  becomes  of  practical  importance 
in  the  statement  of  conditions,  because  it  is  from  that  statement 


YOUR  STATEMENT  OF  CONDITION  171 

that  dividends  are  declared.  If  the  assets  have  been  honestly- 
valued  and  a  surplus  is  available  for  distribution  in  the  form  of 
dividends,  then  a  dividend  may  properly  be  declared;  but  if, 
under  the  head  of  assets,  have  been  included  doubtful  items  or 
items  of  speculation  dependent  for  their  value  on  the  happy 
outcome  of  all  activities,  then  it  may  easily  occur  that  the 
supposed  surplus  does  not  exist  and  the  dividend  declared  would 
therefore  be  drawn  from  the  fund  that  represents  the  capital 
stock.  This  is  what  is  known  as  paying  dividends  to  the  impair- 
ment of  the  capital  fund,  and  such  dividends  may  sometimes  be 
recovered  by  creditors  from  the  recipients,  and  also  in  a  number 
of  jurisdictions  the  declaration  of  such  a  dividend  by  the  directors 
is  a  criminal  offense. 

Bonded  Indebtedness.  Under  this  head  are  included  the 
liabilities  which  have  been  funded  into  more  or  less  permanent 
form,  such  as  in  a  plain  mortgage  or  a  trust  mortgage  securing 
an  issue  of  bonds  or  short  term  notes  (which  are  merely  bonds 
running  for  a  few  years). 

The  bonded  indebtedness  and  the  capital  stock  sections  of 
the  credit  side  of  the  balance  sheet  virtually  represent  the 
fixed  capital  of  the  business.  The  capital  varies  only  when  the 
amount  of  the  capital  stock  is  reduced,  or  increased.  The  bonded 
indebtedness  is  generally  for  a  term  of  years. 

Current  Liabilities.  Current  liabilities  consist  of  accounts 
payable,  notes  payable,  loans  payable,  and  accruals,  and  are 
explained  as  follows: 

Accounts  payable  are  the  accounts  for  which  the  company  is 
liable;  their  total  must  always  agree  with  the  controlling  account 
in  the  general  ledger. 

Notes  payable  (sometimes  called  "bills  payable")  are  the 
instruments  of  indebtedness  of  a  negotiable  character  given  to 
creditors  for  their  bills.  The  term  " bills  payable"  is  loosely 
used  to  include  both  notes  to  merchandise  creditors  and  to 
banks  for  borrowed  money,  but  that  is  only  because  the  exact 
meaning  of  the  term  is  seldom  understood.  Properly  the  heading 
should  be  restricted  to  notes  given  for  outstanding  bills. 

Loans  payable  is  the  account  in  which  is  listed  the  money 
borrowed  on  notes.    The  distinction  is  convenient. 

Accruals  arise  under  the  converse  of  the  theory  which  gave 
"prepaid  operating  expenses."    Here  the  concern  has  had  the 


172  BUSINESS  ACCOUNTANCY 

benefit  of  something  for  which  it  has  not  paid  because  the  pay- 
ment is  not  yet  due.  A  common  example  is  the  interest  to  be  paid 
on  the  maturity  of  a  note,,  mortgage  interest  (which  is  entered 
on  the  books  as  a  monthly  charge  although  seldom  paid  more 
than  semiannually),  and  wages. 

Wages  is  one  of  the  most  important  of  accruals,  but  is  not 
often  found  on  many  otherwise  careful  statements.  Suppose 
wages  run  from  Monday  to  Saturday  and  are  paid  on  Tuesday; 
the  fiscal  year  ends  on  Wednesday.  Then  three  days'  wages  have 
accrued  and  the  liability  should  go  on  the  statement. 

Reserves.  Assets  other  than  cash  will  decrease  in  value; 
of  course  if  one  were  to  speak  with  exactness,  cash  also  would 
be  put  in  the  class  of  fluctuating  worth,  for  money  is  worth 
only  what  it  will  buy  and  hence  is  constantly  changing.  But  I 
hardly  imagine  that  even  an  economic  fanatic  would  attempt  to 
make  up  a  statement  of  absolute  values.  I  cannot  imagine  what 
medium  it  would  be  expressed  in.  For  the  decrease  in  value  of 
assets  we  set  up  reserves  to  care  for  the  possible  and  probable 
impairment.  They  can  be  considered  a  portion  of  the  surplus,  but 
it  is  better  to  consider  them  for  their  specific  uses  and  to  appor- 
tion them  to  the  articles  or  classes  to  which  they  belong.  The 
method  was  given  earlier  in  this  chapter.  The  owner  or  execu- 
tive wants  to  know  the  net  value  of  each  article — its  cost  price 
less  the  depreciation  for  reserve. 

The  three  figures  are  thus  carried  on  the  books  of  the  company 
and  often  in  the  statement  of  operations  (see  the  statement  of 
operations  on  page  155),  but  the  custom  of  bankers  demands 
that  reserves  be  segregated  on  the  statement  of  condition.  The 
statement  of  condition  shown  in  the  next  chapter  gives  the 
method.  The  reserves  should  never  be  deducted  from  the  items 
and  only  the  net  result  shown,  for  in  that  case  the  original  costs 
will  be  lost.    (See  the  incident  of  motor  trucks  on  page  160.) 

Furthermore,  reserves  should  not  be  credited  directly  to  the 
capital  accounts  in  the  statements  of  condition  because  they 
are,  at  the  best,  only  estimates;  no  matter  how  carefully  made, 
they  cannot  be  entirely  accurate;  the  other  figures  on  the  state- 
ment are  absolute — they  represent  facts  and  not  estimates.  If 
estimated  figures  were  mixed  with  fact  figures,  the  net  worth  of 
the  company  calculated  from  the  figures  would  be  but  an  estimate. 

Therefore,  segregate  such  figures  as  are  based  merely  on 
judgment.     Deductions  from  reserves  should  be  made  for  the 


YOUR  STATEMENT  OF  CONDITION  173 

period  which  is  under  consideration  and  should  not  be  distributed; 
the  deduction  is  to  be  made  when  it  actually  occurred  as  with 
the  motor  trucks  (page  161).  Other  reserves,  such  as  those  for 
bad  debts  or  contingent  liabilities,  are  treated  as  being  on  the 
liability  side  of  the  balance  sheet,  for  they  represent  an  amount 
which  has  been  set  aside  from  the  surplus  to  meet  the  conditions 
which  will  be  deflected  to  these  accounts  at  a  later  period. 

Contingent  Liabilities.  The  usual  contingent  liabilities  lie 
in  the  indorsement  of  a  company  of  either  its  own  company's 
notes  or  of  indorsed  papers  of  subsidiary  concerns.  Additional 
contingent  liabilities  will  include  such  claims  or  damage  at  law 
for  incomplete  contracts,  guarantees,  or  agreements.  Long- 
term  contracts,  either  to  buy  or  to  sell,  may  be  contingent 
liabilities. 

Another  form  of  contingent  liability  is  that  to  the  consignors 
of  merchandise  to  the  company  for  the  purpose  of  future  sales. 
This  form  of  liability  should  always  be  the  counter  to  the  con- 
signment account  shown  on   the  asset  side  of  the  balance  sheet. 

Surplus.  The  surplus  is  the  balancing  figure  between  the 
asset  section  and  the  capital  and  liability  section.  This  surplus 
account  is  always  treated  in  detail  and  substantiated  in  fact  by 
the  statement  of  operations  which  covers  all  of  the  operations 
which  brought  it  into  being.  It  is  from  the  surplus  that  divi- 
dends are  declared. 

Net  Worth.  The  net  worth  is  ascertained  by  adding 
together  the  capital  and  surplus,  or  in  the  case  of  a  partnership, 
the  capital  and  the  undivided  profits.  Or,  to  state  the  definition 
in  another  way,  the  net  worth  is  the  difference  between  the 
assets  and  the  liabilities.  It  is  also  the  book  value  of  the  cor- 
poration. The  book  value  of  the  stock  is  ascertained  by  adding 
together  the  capital  and  surplus  and  dividing  the  total  by  the 
number  of  shares  of  stock  issued. 


CHAPTER  XI 

HOW  BANKERS  ANALYZE  YOUR  STATEMENT 
OF  CONDITION 

THE  average  business  man  does  not  seem  to  know  the 
points  of  strength  and  the  points  of  weakness  in  a  statement 
of  condition  from  the  banker's  point  of  view — otherwise  so 
many  statements  would  not  be  submitted  which  even  at  a 
cursory  glance  show  a  financial  condition  which  could  not 
sustain  an  advance  on  unsecured  promissory  notes. 

The  local  bank  with  which  the  depositor  has  intimate  personal 
dealings  may  be  in  a  position  to  lend  money  to  him  without  a 
real  investigation  of  his  financial  affairs — may  lend  on  the  moral 
risk;  but  the  metropolitan  banker  and  more  particularly  the 
dealer  in  commercial  paper  must  be,  in  a  degree,  impersonal 
and  must  depend  for  justification  on  a  satisfactory  statement  of 
condition.  In  the  case  of  the  dealer  in  commercial  paper  this  is 
particularly  necessary,  because  he  buys  from  the  business  man 
and  he  must  in  turn  dispose  of  this  paper  to  banking  institutions 
which  do  not  know  the  maker.  Therefore,  when  he  arrives  at  a 
conclusion  respecting  a  statement,  it  has  even  greater  weight 
than  that  of  the  bank  officer,  because  on  the  reliability  of  the 
commercial  man's  judgment  is  based  his  only  hope  for  profit 
and  also  his  only  hope  of  continued  free  dealing  with  the  bankers 
who  in  turn  buy  the  paper  from  him. 

Two  Surveys  of  Statements  of  Condition.  The  approach 
to  a  statement  of  condition  by  anyone  who  is  about  to  discount 
paper  is  a  very  different  approach  from  that  of  the  investor. 
A  company  which  might  be  in  splendid  condition  for  the  float- 
ing of  a  mortgage  bond  issue,  or  even  for  the  sale  of  stock,  may 
be  hopelessly  bad  from  the  strictly  banking  point  of  view. 

The  difference  is  this:  The  investor  looks  at  a  concern  with 
the  thought  of  whether  or  not  he  will  eventually  get  his  money 
back  with  interest.    The  taker  of  paper  is  not  so  much  concerned 

174 


WHAT  YOUR  BANKER  EXPECTS  175 

with  the  eventual  capacity  to  liquidate  above  the  amount  of 
all  debts  as  he  is  with  the  present  capacity  to  meet  the  current 
liabilities  as  they  mature.  The  investor  will  look  to  the  plant, 
to  the  real  estate,  to  the  fundamental  strength,  and  to  the  entire 
liquidating  value. 

But  these  sources  of  eventual  strength  are  of  comparatively 
little  moment  to  the  man  who  wants  to  know  that  the  paper  he 
discounts  can  be  paid  at  its  maturity.  Hence  he  looks  only  at 
the  quick  assets  and  the  current  liabilities.  If  these  are  good  he 
wants  to  know  what  is  behind  them;  but  if  these  are  not  good, 
the  other  matters  are  of  comparatively  little  importance.  The 
quick  assets  are  the  cash,  the  bills  and  accounts  receivable,  and 
the  merchandise.  The  current  liabilities  are  the  notes  and  the 
accounts  payable. 

The  exactly  proper  relation  between  the  quick  assets  and  the 
current  liabilities  depends  upon  the  nature  of  the  business; 
that  is,  the  terms  of  its  credit  and  the  marketability  of  the 
merchandise.  The  ideal  situation  is  when  the  cash  on  hand  and 
the  accounts  and  bills  receivable  will  of  themselves  liquidate 
the  notes  and  the  accounts  payable,  leaving  the  merchandise  on 
hand  as  additional  collateral.  This  ideal  is  seldom  realized  and 
therefore  the  relation  between  the  quick  assets  and  the  current 
liabilities  is  determined  on  the  forced  sale  value  of  the  assets. 

In  ordinary  business  it  is  calculated  that  the  accounts  receiv- 
able, bills  receivable  and  the  merchandise  will  bring  one  half 
their  face  value  in  liquidation;  and  therefore  the  broad  rule  is 
established  that  the  quick  assets  should  be  double  the  current 
liabilities.  This  is  not  to  be  taken  at  all  as  a  general  rule.  It 
has  almost  as  many  exceptions  as  it  has  applications. 

For  instance,  in  the  case  of  a  packer,  the  accounts  receivable 
are  nearly  always  worth  their  book  value  because  the  credits 
are  very  short,  seldom  extending  beyond  a  week;  and  the  stock 
on  hand,  consisting  of  meat  products,  is  almost  instantly  salable. 
Groceries,  hardware,  and  shoes,  on  the  other  hand,  require  fully 
a  2  to  1  ratio.  Makers  of  stoves  would  require  even  a  larger 
ratio,  while  textile  mills  do  not  require  the  full  ratio  because,  in 
addition  to  their  quick  assets,  a  mill  property  is  quickly  salable — 
here  the  banker  generally  does  look  beyond  the  quick  assets 
toward  the  fixed  assets. 

A  General  Rule.  The  broad  rule  for  estimating  any  state- 
ment offered  for  the  purpose  of  establishing  a  discount  line  is 


176  BUSINESS  ACCOUNTANCY 

this:  Will  the  paper  be  self -liquidating?  That  is,  are  the  quick 
assets  of  sufficient  volume  and  in  sufficient  excess  of  the  current 
liabilities  to  make  certain  the  payment  of  the  paper? 

The  fact  that  plant  investments  or  other  slow-moving  assets, 
no  matter  what  their  intrinsic  worth,  are  not  taken  largely  into 
account  by  bankers,  is  often  incomprehensible  to  the  business 
man.  The  reason  therefor  has  been  explained.  The  banker 
must  have  self-liquidating  paper.  If  the  business  man  has 
assets  which  are  not  self-liquidating,  he  is  in  the  wrong  shop 
when  he  comes  to  the  dealer  in  commercial  paper.  He  should  go 
to  the  investment  banker  who  will  arrange  for  financing  on  the 
basis  of  the  actual  investment  as  well  as  the  profits. 

Now  as  to  the  statement  itself:  It  is  required  that  the 
statement  be  of  the  end  of  the  last  fiscal  year  and  it  is  highly 
desirable,  and  in  some  cases  essential,  that  the  statements  for 
two  or  three  years  preceding  be  also  furnished,  because  these 
permit  the  banker  to  discover  whether  the  business  is  going 
backward  or  forward,  and  they  also  will  promote  inquiry  by  him 
if  in  any  one  year  a  single  item  seems  out  of  proportion. 

The  Details  of  the  Statement.  Taking  up  the  items  on 
the  statement  itself  and  referring  to  the  more  or  less  standard 
form  which  is  here  given,  let  us  examine  the  assets  and  their 
relations : 

Cash  on  hand  and  in  banks — There  should  be  a  reasonable 
bank  deposit.  If  an  applicant  shows  a  net  worth  of  $100,000 
and  has  only  $200  in  the  bank,  it  excites  suspicion,  especially 
if  among  the  liabilities  are  a  certain  number  of  notes  payable. 
A  statement  before  me  shows  $464,000  in  quick  assets  and  bank 
loans  of  $100,000.  The  cash  in  the  bank  amounts  only  to  $3,800. 
How  did  that  man  secure  such  a  loan  on  such  a  small  deposit? 

Accounts  receivable — Accounts  receivable  are  divided  into 
three  sections:  (1)  the  good  accounts  receivable,  (2)  those  due 
from  officers  and  the  like,  (3)  those  from  subsidiary  companies. 
The  accounts  receivable  and  also  the  bills  receivable  (which  are 
taken  up  in  the  next  section)  due  from  officers,  employees,  or  sub- 
sidiary companies,  are  at  once  to  be  stricken  from  consideration. 
They  depend  for  their  payment  upon  the  successful  prosecution 
of  the  business,  and  in  the  event  of  failure  the  subsidiary  company 
accounts  of  bills  will  undoubtedly  be  uncollectable  and  probably 
the  officers'  and  employees'  accounts  and  bills  will  in  all  prob- 
ability also  be  without  value. 


WHAT  YOUR  BANKER  EXPECTS  177 

It  is  important  to  know  if  any  of  the  accounts  receivable  are 
overdue  or  if  any  have  been  pledged.  Those  which  are  pledged 
are,  of  course,  no  longer  assets  at  their  face  value.  They  must 
be  deducted,  while  those  that  are  overdue  are  of  problematical 
value  and  may  or  may  not  be  considered. 

The  terms  of  sale  and  the  maximum  and  minimum  periods 
of  the  year  are  to  permit  a  comparison  with  the  merchandise 
on  hand.  For  instance,  a  concern  doing  an  annual  business  of 
$900,000  a  year  has  $600,000  in  accounts  receivable,  and  the 
terms  of  credit  are  60  days.  Therefore  most  of  the  accounts 
receivable  above  $150,000  must  be  overdue;  the  collection 
methods  of  the  concern  are  bad.  In  this  estimate,  local  condi- 
tions must  always  be  taken  into  account.  For  instance,  if  the 
business  sells  in  the  South  it  will  probably  have  to  grant  credit 
terms  that  will  permit  payment  when  the  cotton  comes  into 
market  and  the  great  southern  pay  day  arrives.  Or  it  may  be 
that  trade  customs  make  necessary  the  long  datings.  For  in- 
stance, in  quite  a  number  of  lines,  goods  sold  in  January  must 
have  May  datings.  All  such  matters  should  be  explained  by  a 
note  to  the  statement. 

Bills  receivable — The  bills  receivable  item  should  receive 
a  scrutiny  with  due  regard  to  the  nature  and  the  customs  of  the 
business.  It  may  be  taken  almost  as  a  general  rule  that  the 
ordinary  house  takes  notes  for  accounts  receivable  only  when 
the  debtor  is  unable  to  pay  the  open  account  on  the  due  date. 
Such  bills  are  in  more  convenient  shape  than  overdue  accounts 
payable,  but  they  have  no  greater  validity.  On  the  other  hand, 
in  not  a  few  lines  that  have  rather  long  datings  it  is  the  custom 
to  give  notes,  and  they  are  as  promptly  met  at  maturity  as 
would  be  the  best  account  receivable. 

In  bills  receivable  the  matter  of  trade  acceptances,  which 
are  coming  more  and  more  into  vogue,  should  not  be  confused 
with  the  ordinary  run  of  notes  taken  in  the  course  of  trade. 

If  any  of  these  bills  are  overdue  or  if  any  have  been  renewed 
or  extended,  they  should  be  disregarded  in  the  estimate  unless 
some  very  satisfactory  explanation  accompanies  them. 

It  is  also  important  under  this  head  to  know  if  there  are  out- 
standing any  discounted  bills  receivable  or  any  other  liability 
arising  from  discount  or  rediscount,  because  here  exists  a  con- 
tingent liability  until  the  notes  are  actually  paid,  as  was  brought 
out  most  strikingly  and  most  unfortunately  in  the  failure  of 
a  very  large  dry  goods  house. 


178  BUSINESS  ACCOUNTANCY 

Merchandise — Under  the  head  of  merchandise  the  first  point 
is  to  know  how  it  is  valued.  It  should  always  be  valued  at  cost 
unless  the  cost  be  above  market  price.  If  the  cost  be  above 
the  market  price,  then  it  should  be  at  market  value.  This  rule 
is  one  of  safety,  and  undoubtedly  it  is  not  always  just,  for  in  the 
case  of  certain  raw  materials,  as  pig  iron,  steel,  and  so  forth, 
the  value  of  that  which  was  purchased  before  the  war  is  doubled 
or  tripled,  and  is  almost  as  quick  an  asset  as  cash  in  the  bank. 
However,  if  these  items  were  constantly  fluctuated  with  the 
market,  the  whole  heading  would  have  to  be  largely  discounted; 
for,  with  its  value  changing  from  day  to  day,  the  inventory 
would  have  to  be  correspondingly  shifted,  with  the  result  that, 
instead  of  a  base  asset,  one  would  have  a  speculative  asset. 

Another  point  is  that  a  book  profit  on  merchandise  on  hand 
should  not  be  taken  until  a  sale  has  actually  been  made  and  the 
merchandise  transformed  into  cash  or  an  account  receivable. 
Of  course,  any  merchandise  held  under  consignment,  or  under 
a  trust  receipt,  does  not  belong  to  the  maker  of  the  statement 
and  is  to  be  disregarded. 

The  question  of  stock  turnover — The  stock  on  hand  should 
not  be  so  great  as  to  prevent  a  reasonable  annual  turnover,  and 
here  a  comparison  is  made  with  the  amount  of  the  gross  sales 
and  both  the  gross  and  the  net  profits.  If  the  stock  of  goods  is 
so  large  that  a  slow  turnover  is  inevitable  and  the  gross  and  net 
profits  are  both  relatively  small,  it  may  usually  be  assumed  that 
the  methods  might  well  be  improved.  And  again  it  must  be 
remembered  that  the  inventory  is  generally  taken  at  the  lowest 
stock  point  of  the  year,  and  hence  a  very  high  total  at  that  time 
shows  particularly  bad  judgment.  The  exact  amount  of  the 
turnover  cannot  be  judged  without  a  knowledge  of  the  circum- 
stances; if  the  transportation  be  slow,  naturally  the  stock  will 
have  to  be  larger  than  with  a  house  which  is  within  easy  reach 
of  all  markets.  But  that  same  out-of-the-way  house  should  be 
able  to  show  a  sizable  new  profit — with  a  slow  turnover  it  can- 
not attempt  to  do  business  on  the  same  scale  of  profit  per  scale 
as  the  man  who  is  able  to  turn  quickly. 

Real  estate  and  buildings,  machinery  and  fixtures — These 
items  are  of  little  interest  to  the  dealer  in  commercial  paper  or 
to  the  discount  bank  except  under  peculiar  circumstances.  If 
they  are  obviously  inadequate,  the  suspicion  arises  that  perhaps 
the  money  borrowed  is  for  capital  purposes,  instead  of  to  meet 
current  needs. 


WHAT  YOUR  BANKER  EXPECTS  179 

Just  how  much  should  go  into  plant  and  equipment  is  again 
a  matter  of  cases,  and  again  the  plant  is  or  is  not  considered  in 
the  current  net  worth  value  according  to  its  salability.  One 
manufacturer  showed  a  very  large  real  estate  value  in  com- 
parison with  his  other  assets,  but  it  appeared  that  he  had  just 
moved  into  a  new  factory  and  was  still  carrying  his  old  plant 
as  real  estate;  the  old  plant  was  on  the  market  and  would  be 
disposed  of  as  soon  as  the  choice  could  be  made  between  several 
offers — all  of  which  were  above  the  appraised  value.  In  that 
case  the  surplus  real  estate  was  considered  practically  as  a  quick 
asset.  But,  generally  speaking,  plants  and  machinery  have 
little  value  except  to  the  going  business,  and  the  discount  on 
their  forced  sale  is  enormous. 

It  is  surprising  how  many  manufacturers  pour  money  into 
their  plants  without  a  thought  of  keeping  the  enterprise  in 
balance.  The  real  estate  should  be  at  its  appraised  value,  and 
the  machinery  and  fixtures  at  their  purchased  value,  with  a 
depreciation  reserve  set  up  against  all  of  these  items.  Although 
the  plant  values  have  so  little  to  do  with  the  granting  of  credit 
lines,  yet  proper  depreciation  is  a  sort  of  assurance  that  the  busi- 
ness man  is  not  fooling  himself  on  his  statement. 

Incidentally,  it  may  be  noted  that  the  not  infrequent  habit 
of  bolstering  up  the  fixed  assets  by  increasing  the  value  of  the 
real  estate,  and  neglecting  the  depreciation  element  on  machinery 
in  order  to  give  a  better  credit  rating,  are  of  but  little  help  in 
borrowing  money.  The  quick  assets  to  control;  indeed  a  swell- 
ing of  the  fixed  assets  may  have  quite  the  contrary  effect  from 
that  intended,  for  the  additions  may  throw  the  business  entirely 
out  of  balance. 

If  the  title  to  real  estate  is  not  directly  in  the  corporation, 
the  whole  item  must  be  disregarded.  It  is  not  uncommon  to 
find  the  realty  title  in  the  name  of  an  officer  even  where  the 
company  claims  to  have  the  sole  beneficiary  interest  and  puts 
the  value  on  its  statement. 

Notes  payable — Notes  should  not  generally  be  given  for 
merchandise  unless  under  circumstances  where  no  cash  discounts 
are  allowed;  a  large  amount  under  this  item  is  fatal,  for  it  gener- 
ally means  that  the  great  advantage  of  cash  discounts  is  not 
taken.  However,  there  are  exceptions.  I  know  one  extraordi- 
narily sound  firm  which  has  always  given  notes  to  one  manufac- 
turer. When  pressed  for  a  reason,  they  could  not  give  one,  but 
they  emphatically  said  that  they  were  going  to  continue  the 


180  BUSINESS  ACCOUNTANCY 

practice — because  "they  had  always  dealt  that  way."  The  loans 
payable  to  the  banks  are  evidences  of  credit,  and  are  a  good  sign 
if  the  accounts  payable  are  low — they  are  evidences  that  dis- 
counts are  being  regularly  taken.  The  amounts,  however,  must 
be  safely  within  reason  or  the  ratio  of  assets  and  liabilities  will 
not  come  out  right. 

Loans  payable  through  brokers  have  a  twofold  interest  for 
the  dealer;  first  is  the  ascertainment  of  the  outstanding  liabilities 
and  the  second  is  more  personal;  no  broker  wants  to  be  merely 
a  part  of  a  financing  chain.  The  profit  on  the  brokerage  of  paper 
is  very  small — only  0.25%  of  the  face  value,  regardless  of  ma- 
turity— and  the  money  is  to  be  made  by  them  only  through 
regular  customers.  It  costs  not  a  little  to  investigate  clients 
before  accepting  a  line,  and  all  that  cost  goes  for  nothing  if  the 
client  is  what  is  called  a  "shopper"  who  flits  from  broker  to 
broker  bargaining  on  rates. 

In  the  end,  too,  it  is  bad  for  the  business  man;  the  banks  like 
to  see  paper  of  one  firm  brought  in  only  by  one  broker  because 
they  must  trust  largely  to  the  statements  of  that  broker,  and 
they  feel  that  several  brokers  will  not  have  the  same  intimate 
touch  as  will  a  single  broker  who  conducts  all  of  the  financing — 
therefore  the  paper  is  not  always  acceptable.  Again,  if  the 
money  market  becomes  tight,  the  broker  will  save  his  resources 
for  the  regular  client  whom  he  must  satisfy,  and  will  turn  down 
the  shopper. 

If  any  part  of  the  borrowing  is  on  collateral,  the  banker  is 
entitled  to  know  how  much  and  what  collateral;  he  should  know 
that  there  are  no  strings  on  the  assets,  and  the  same  thought 
applies  to  borrowing  by  local  branches.  All  borrowing  should 
be  by  the  home  office,  or  it  will  not  be  able  always  to  coordinate 
its  finances. 

Accounts  payable — Since  the  house  is  presumed  to  discount, 
the  accounts  payable  should  be  less  than  the  bills  payable.  If 
they  are  high  in  proportion  to  the  bills  payable,  and  also  in  pro- 
portion to  the  merchandise  and  the  other  quick  assets,  probably 
the  firm  is  cramped  for  capital.  The  terms  of  purchase  must  be 
here  considered.  But  large  accounts  payable  as  compared  with 
the  merchandise  on  hand  is  not  an  infallible  sign  of  weakness; 
take  the  firm  which  has  the  factory  fill  many  of  its  orders  directly 
to  the  customer.  I  recall  one  firm  whose  business  consisted 
largely  of  such  "drop  orders,"  and,  consequently,  their  account? 
were  out  of  all  proportion  to  merchandise. 


WHAT  YOUR  BANKER  EXPECTS  181 

Considering  the  other  liabilities  together;  a  mortgage  or  a 
bond  issue  is  not  important  (although  a  risk  is  always  somewhat 
better  without  it)  unless  the  principal  or  the  interest  falls  due 
within  the  terms  of  the  notes  which  are  to  be  discounted.  Then 
such  payments  must  be  regarded  as  current  liabilities  unless 
arrangements  have  already  been  made  for  refunding.  Of  course 
the  amount  of  the  mortgage  is  always  deducted  from  the  face 
value  of  the  realty  when  considering  that  item  alone.  If  the 
mortgages  should  also  cover  income  and  floating  assets  as  well 
as  fixed  assets,  that  point  must  be  taken  into  consideration.  A 
few  concerns  take  deposits  from  their  employees  or  others;  if 
these  deposits  are  subject  to  withdrawal  without  notice  or  on 
short  notice,  they  must  be  put  into  the  current  liability  class. 

The  reserves  are  of  importance  dependent  upon  the  form  in 
which  they  are  kept,  but  the  undivided  profits  and  the  surplus 
are  only  evidences  of  prosperity — they  have  no  loaning  value, 
for  they  may  be  paid  out  overnight.  Again  there  are  exceptions; 
in  some  states  taxation  is  avoided  by  keeping  down  the  capital- 
ization, and  thus  much  is  carried  as  surplus  which  is  really  capi- 
tal. One  striking  case  of  this  is  a  corporation  which  has  a 
capital  of  $80,000  and  a  reserve  of  $1,000,000;  but  four  men  own 
all  the  capital  stock  and  we  have  them  indorse  the  notes  in  order 
that  a  hold  may  be  had  on  the  surplus — if  it  were  distributed, 
these  four  men  would  have  to  get  it. 

The  contingent  liabilities  are  the  indorsement  of  notes  which 
have  been  above  mentioned,  or  contracts  of  guaranty  or  surety- 
ship; on  all  of  these  the  possibility  of  loss  is  to  be  considered,  and 
also  the  business  judgment  of  imperiling  the  assets  for  other 
than  absolutely  necessary  and  profitable  enterprises. 

Competent  Audit  Adds  Value.  Of  course  a  statement  is 
much  the  better  for  having  been  audited  by  a  competent  accoun- 
tant of  established  reputation;  sometimes  we  have  discovered  that 
the  account  has  been  audited,  but  the  applicant,  for  some  reason 
best  known  to  himself,  answers  "No."  In  that  case  a  loan  is 
never  made — a  man  who  is  once  caught  telling  an  untruth  about 
any  statement  matter  is  never  a  good  risk,  no  matter  what  his 
apparent  worth.  The  personnel  of  the  auditors  is  important; 
they  should  be  men  of  established  integrity. 

The  questions  outside  the  statement  of  condition  are  all  for 
the  general  information  of  the  banker  to  enable  him  to  get  the 
stage  setting  of  the  enterprise.    Officers  who  have  other  and 


182  BUSINESS  ACCOUNTANCY 

prosperous  commercial  connections  give  a  guaranty  of  sorts  that 
the  business  under  consideration  is  well  managed.  The  com- 
munity standing  of  officers  and  directors  has  a  large  share  in 
determining  the  extra-statement  reasons  for  credit.  The  pur- 
pose of  the  other  questions  on  the  statement  is  self-evident,  and 
most  of  them  have  already  been  mentioned. 

Thus  far,  only  the  statement  proper  has  been  considered, 
together  with  a  few  collateral  questions.  A  dealer  in  com- 
mercial paper  makes  many  more  inquiries  before  he  accepts 
a  client;  he  writes  to  every  bank  in  the  vicinity,  to  other  busi- 
ness houses  in  the  vicinity,  and  in  every  way  tries  to  discover 
as  much  purely  personal  information  as  is  possible;  for  no  one 
realizes  better  than  the  broker  that  if  a  man  sets  out  to  be 
dishonest  he  can  undoubtedly  fool,  for  a  time,  any  banker  or 
broker  that  ever  lived.  The  personal  equation  is  always  a 
large  one. 

The  nearer  the  statement  approaches  the  ideal  which  has 
been  outlined,  the  better  the  credit  chances;  and  the  farther  it 
recedes  from  the  standard,  the  less  become  the  chances.  And, 
in  every  case,  the  statement  which  speaks  for  itself  is  more 
acceptable  than  one  which  requires  explanation. 


CHAPTER  XII 

WHAT  IS  GOOD  WILL  REALLY  WORTH  ? 

GOOD  will  is  an  intangible  asset — one  cannot  put  his  finger 
on  a  concrete  object  and  say,  "This  is  the  good  will." 
Because  it  is  intangible  and  is  to  be  judged  only  by  the 
results  which  it  brings  about,  it  is  not  to  be  taken  as  a  purely 
imaginary  asset  or  one  to  be  valued  with  the  aid  of  the  emotions 
rather  than  the  intellect.  It  must  be  said  that  often  the  value 
put  on  good  will  is  purely  emotional — in  it  are  contained  the 
hopes  of  the  future. 

I  have  seen  a  company,  nearly  insolvent  and  doing  little  or 
no  business,  value  its  good  will  at  $200,000;  only  a  lack  of  famil- 
iarity with  higher  figures  prevented  a  value  reaching  into  the 
millions.  It  is  because  the  figures  so  often  put  on  good  will 
are  not  the  result  of  scientific  calculation,  and  because  the  good 
will  itself  may  be  so  easily  damaged  or  destroyed  that,  as  an 
asset,  it  is  generally  viewed  with  suspicion. 

But  good  will  is  an  asset;  not  seldom  it  is  the  largest  asset 
— as  in  the  case  of  some  investment  houses  where  the  reputation 
for  fair  dealing  in  sound  securities  is  worth  more  in  the  way  of 
business  through  the  year  than  are  the  total  concrete  assets. 
In  the  case  of  a  professional  man,  good  will  is  his  only  real  asset, 
for  it  is  his  reputation  for  skilled  service  that  brings  him  clients. 
A  contractor's  record  for  honest  building  is  usually  worth  more 
to  him  than  such  of  his  assets  as  can  quickly  be  converted. 

Can  Good  Will  Be  Valued?  The  asset  worth  of  good  will 
can  be  arrived  at  with  a  very  fair  degree  of  certainty  unless  the 
good  will  be  so  intimately  bound  up  with  personal  reputation 
that  it  becomes  purely  personal,  and  is  thus  not  a  matter  which 
can  be  transferred  to  other  hands. 

What  is  good  will?  The  best  definition  is  that  which  has 
been  placed  upon  it  by  the  courts.  In  the  case  of  Washburn  vs. 
National  Wall  Paper  Company  in  the  United  States  Circuit 
Court  of  Appeals  (81  Fed.  Rep.  20),  the  court  gave  this  definition: 

1S3 


184  BUSINESS  ACCOUNTANCY 

When  an  individual  or  a  firm  or  a  corporation  has  gone  on  for  an  unbroken 
series  of  years  conducting  a  particular  business  and  has  been  scrupulous  in 
fulfilling  its  obligations  and  careful  to  maintain  the  standard  of  the  goods 
dealt  in,  and  absolutely  fair  and  honest  in  its  business  dealings,  that  customers 
of  the  concern  were  convinced  that  their  experience  in  the  future  would  be  as 
satisfactory  as  in  the  past;  while  such  customers'  good  report  of  their  own 
experience  tends  continually  to  bring  new  customers  to  the  concern,  there  has 
been  produced  an  element  of  value  quite  as  important — in  some  cases,  perhaps 
far  more  important — than  the  plant  or  machinery  with  which  the  business  is 
carried  on.  That  it  is  property,  is  abundantly  settled  by  the  authority  and 
indeed,  is  not  disputed.  That  in  some  cases  it  may  be  very  valuable  property 
is  manifest.  The  individual  who  has  created  it  by  years  of  hard  work  and 
fair  business  dealings  usually  experiences  no  difficulty  in  finding  men  willing 
to  pay  him  for  it  if  he  be  willing  to  sell  it  to  them. 

The  courts  in  the  United  States  have  universally  recognized 
that  good  will  is  an  asset;  the  injunctions  which  have  been 
issued,  and  the  damages  which  have  been  assessed  in  the  cases 
of  unfair  competition  are  founded  on  the  doctrine  of  good  will. 
For  instance,  a  trade  name  (not  a  trademark)  may  have  acquired 
a  great  value  through  long  years  of  business;  the  courts  protect 
that  name  from  use  by  a  competitor,  terming  such  practice 
"unfair  competition,"  because  the  competitor  seeks  to  go  for- 
ward by  the  theft  of  one  of  the  assets  of  the  original  trader — of 
his  good  will. 

Some  of  the  cases  have  gone  very  far  indeed,  and  a  man 
has  even  been  restrained  from  using  his  own  name  in  trade  when 
it  was  the  same  as  that  of  a  long-founded  establishment  which 
had  acquired  a  peculiar  trade  value,  and  especially  if  the  com- 
petitor were  only  a  dummy  set  up  by  promoters  to  cut  in  on  the 
old  business.  Trade  names  of  articles,  not  protected  by  regis- 
tration, have  come  under  the  same  theory  of  protection.  A 
leading  case  concerned  the  son  of  a  great  inventor;  a  group  of 
promoters  hired  him  to  lend  his  name  to  a  corporation.  The 
court  granted  the  inventor  an  injunction  on  the  ground  that  the 
use  of  the  family  name  by  the  son  was  only  for  the  purpose  of 
confusing  the  public  between  the  two  organizations. 

How  the  Courts  Protect  Good  Will.  The  courts  rule  ap- 
proximately thus:  If  A  has  been  established  and  the  public  buys 
A's  article  because  of  his  name,  then  B,  a  later  entrant  into  the 
trade,  will  be  restrained  from  using  a  name  so  similar  to  that 
of  A  that  the  public  may  buy  the  B  article  under  the  impression 
that  it  is  the  A  article.  They  say  that  in  such  case  A's  good 
will  must  be  protected.     Of   course  there  are  exceptions,  and 


FIGURING  GOOD  WILL  185 

each  case  is  judged  on  its  own  merits,  but  the  rule  is  more  or 
less  as  stated. 

The  point  is  that  the  courts  recognize  that  good  will  is 
a  property  rifht  and  entitled  to  protection;  in  one  case  a  judge 
said  that  he  thought  the  time  would  not  be  far  distant  when 
stealing  good  will  would  be  regarded  as  a  criminal  offense,  on 
a  plane  with  the  stealing  of  tangible  property. 

If  good  will  is  an  asset  because  it  produces  business,  then 
the  measure  of  its  value  must  be  the  business  which  it  produces. 
How  is  this  motive  force  to  be  calculated  in  accountancy? 

The  basis,  as  used  by  most  of  the  accountants,  is  to  set  up 
the  value  of  good  will  on  so  many  years'  average  net  profit 
earned  by  reason  of  the  existence  of  good  will;  to  find  this  profit 
it  is  necessary  first  to  ascertain  the  average  capital  invested. 
A  common  error  is  to  take  only  the  profits  for  a  number  of  years, 
find  an  average  yearly  profit,  and  then  deduct  the  amount  which 
the  appraiser  considers  should  be  earned  by  a  business  in  any 
event.  The  resulting  figure  is  then  called  the  annual  profit  due 
to  good  will. 

This  method  does  not  recognize  the  profits  derived  from  the 
capital  already  in  the  business;  such  profits  should  be  estimated 
and  deducted  before  any  figure  is  reached  which  can  properly  be 
termed  a  value  of  the  good  will.  All  money  is  presumed  to  earn 
at  least  a  banker's  interest;  the  good  will  is  the  earning  power 
over  and  above  that  figure. 

It  is  easier  to  reason  from  a  concrete  example.  Take  the 
methods  followed  in  the  two  cases  here  given.  From  these  the 
following  principles  can  be  deduced: 

Case  number  1.  (Form  66).  The  average  capital  invested 
was  arrived  at  by  averaging  the  total  preferred  capital  stock 
outstanding  for  the  periods  that  were  reviewed. 

Having  secured  this  figure,  interest  was  computed  at  7% 
for  two  reasons: 

1.  It  is  stipulated  in  the  certificate  of  incorporation  that 
the  preferred  stock  of  the  company  shall  bear  7%,  and — ■ 

2.  It  is  a  fair  return  upon  the  investment  in  a  private  enter- 
prise— always  a  somewhat  hazardous  venture  for  the  investor. 

In  addition  to  the  deduction  for  interest  upon  capital  invested, 
is  considered  the  compound  interest  upon  the  amount  invested 
as  good  will.    Inasmuch  as  the  value  of  this  intangible  asset  is 


APPRAISAL  OF  THE 

Income  from 
Operations 

6  months  ended  October  31.  *909 

6 

955 

77 

6 

1      •   April    30.  1910 

77 

158 

98 

6   ' 

•     •»   October  31,  1910 

108 

632 

83 

8   ■ 

•      ■   June     30.  1911 

247 

852 

27 

6   ' 

•      ■   December  31,  1911 

183 

925 

81 

6   ' 

'      M   June     30,  1912 

310 

246 

15 

6   ' 

»      ■   December  31,  1912 

242 

459 

27 

6   • 

•      M   June     30.  1913 

453 

972 

16 

6   ' 

'      ■   December  31,  19 13 

481 

334 

62 

6   • 

•     ■   June     30,  1914 

680 

595 

42 

6   • 

•      ■   December  31,  1914 

348 

946 

24 

6   • 

•      "   June     30,  1915 

739 

470 

47 

6   • 

1      ■   December  31,  1915 

372 

597 

67 

6   ' 

1      ■   June     30,  1916 

410 

412 

06 

6   • 

•      "   December  31.  1916 

429 

739 

30 

6   • 

•      "   June     30,  1917 

528 

784 

95 

6   • 

•      ■   December  31,  1917 
TOTALS 

263 

363 

72 

5 

886 

447 

69 

Total  Excess  of  Income  over  Costs  for 
Eight  Years  and  Eight  Months 

Average  Yearly  Profits 
7%   on  ($392,820)  Average  Amount 
of  Preferred  Stock  Issued 
and  Outstanding 

Capitalized  at  10  Years 
Less:  Compound  Interest  at  7%   on 
Profits  Anticipated  by  Capitalising 

' 

Value  of  Good  Will  January  1,  1918 

[ 

1M 


VALUE     OF     GOOD     WILL 


Cost   of 
Operations 

Excess  of  In- 
come over  Cost 

Capital  Employed 

,.     2 

068 

79 

4 

886 

98 

50 

000 

00 

62 

679 

82 

14 

479 

16 

50 

000 

00 

77 

423 

38 

31 

209 

45 

50 

000 

00 

200 

531 

99 

47 

320 

28 

50 

000 

00 

158 

517 

00 

25 

408 

81 

85 

000 

00 

204 

031 

38 

io  6 

214 

77 

87 

100 

00 

162 

765 

20 

79 

694 

07 

90 

600 

00 

308 

425 

83 

145 

546 

33 

96 

500 

00 

380 

419 

07 

100 

915 

55 

100 

000 

00 

435 

806 

87 

244 

788 

55 

476 

000 

00 

279 

013 

6o 

69 

932 

64 

414 

000 

00 

489 

371 

54 

250 

098 

93 

329 

000 

00 

338 

840 

79 

33 

756 

88 

289 

000 

00 

382 

884 

63 

27 

527 

43 

289 

000 

00 

( 

409 

856 

12 

19 

883 

18 

274 

000 

00 

395 

210 

39 

133 

574 

56 

274 

300 

00 

I 

302 

869 

65 

39 

505 

93 

400 

000 

00 

1      4 

590 

716 

05 

1 

295 

731 

64 

3 

404 

500 

00 

FORM  66:    A  form  such  as  shown  on  this 

(      1 

295 

731 

64 

and    the  opposite  page  aids  materially  in 
arriving  at  a  correct  appraisal  of  good  will. 
The   basis   used   by   many   accountants   in 

149 

507 

52 

40 

27 

4Q7 

arriving  at  these  figures  is  to  set  up  the  value 
of  good  will  on  a  certain  number  of  years' 
average  net  profit.    To  find  this  profit,  it  is 
necessary  to  determine  the  average  capital 
invested.     All  money  is  presumed  to  earn 
a  banker's  interest  and  good  will  is  the  earn- 
ing power  over  and  above  this.     Note  that  the 

122 

010 

12 

1 

220 
239 

101 

983 

20 
72 

980 

117 

48 

si 
tr 

x  mont 
te  cost 

is  endi 
of  oper 

ng  D 

ation 

ecemb 
in  exc 

er31,  1 

:ss  of  tl 

917  she 
le  incor 

ws 
ne. 

1S7 


188  BUSINESS  ACCOUNTANCY 

something  that  will  be  realized  upon  in  the  future  over  a  certain 
number  of  years,  the  fact  is  clearly  presented  that  these  earnings 
have  been  discounted  or  anticipated. 

The  profits  have  to  materialize  before  the  amount  invested 
in  good  will  is  recovered,  and  the  interest  upon  the  anticipation 
of  profits  is  thus  a  justified  charge  against  the  value  of  good  will. 

The  final  excess  of  income  over  cost  of  $1,295,731.64  extends 
over  a  period  of  eight  years  and  eight  months  resulting  in  an 
average  net  profit  of  $149,507.52  per  year. 

The  average  capital  invested  was  ascertained  to  be  $392,820, 
upon  which  is  the  annual  fixed  interest  charge  of  7%,  or 
$27,497.40.  The  interest  on  the  borrowed  capital  of  the 
company  is  disregarded. 

The  Life  of  Good  Will.  Before  deducting  the  amount  of 
compound  interest  due  through  anticipation  of  profits  from  the 
investment  of  good  will,  one  must  consider  the  number  of  years 
at  which  to  capitalize  this  residue  of  earnings. 

This  period  largely  depends  upon  the  character  of  the  business. 
Authorities  seem  to  concur  that  a  professional  business'  good 
will  does  not  extend  beyond  two  years  by  reason  of  the  element 
of  personal  touch  that  enters  into  all  transactions  and  which 
will  not  continue  unless  the  successor  to  the  good  will  earns  the 
same  amount  of  approbation  that  his  predecessor  had,  thereby 
creating  a  good  will  distinctly  his  own. 

In  a  manufacturing  or  mercantile  business  the  good  will 
will  probably  extend  over  four  or  five  years  by  reason  of  existing 
trade  name,  trademarks,  and  so  forth.  Newspapers  and  other 
semimonopolies  can  allowably  stand  a  far  higher  number  of 
years'  capitalizing  of  net  profits. 

The  test  of  the  life  of  the  good  will  in  new  hands  is  the  oppor- 
tunity which  the  business  affords  to  the  purchaser  to  create  a 
good  will  of  his  own;  if  the  transactions  are  frequent,  the  new 
personality  will  quickly  replace  the  old;  but,  if  infrequent,  then 
it  may  be  taken  that  the  customers  will  be  drawn  to  the  old  name 
over  a  long  period  of  years.  For  instance,  a  trading  concern 
will  be  likely  to  have  at  least  several  trades  a  year  with  an 
individual  and  he  will  soon  become  accustomed  to  the  new 
management  and  trust  to  it  and  not  the  memory  of  his  former 
treatment.  But  in  another  line,  such  as  the  contracting  business, 
services  will  be  rendered  to  the  same  people  not  commonly  more 
than  from  once  a  year  to  once  in  10  years,  for  the  matters  with 


FIGURING  GOOD  WILL  189 

which  a  contractor  deals  are  not  of  frequent  occurrence  in  the 
ordinary  customer's  career. 

Determining  the  Capitalization  Value  of  Good  Will. 
In  the  business  which  we  are  giving  as  an  illustration,  it  seemed 
that  it  would  reasonably  take  10  years  to  create  a  new  good  will. 
Therefore  we  capitalized  the  value  at  $1,220,101.20  less  the 
deduction  of  $239,983.72,  which  represents  the  compound 
interest  at  7%  upon  the  anticipated  profits  for  10  years,  leaving 
a  balance  of  $980,117.48  as  the  value  of  the  good  will. 

Case  number  2.  This  was  a  contracting  firm.  The  further  fact 
is  brought  into  consideration  that  good  will  is  generally  acquired 
by  the  purchase  from  some  individual  of  a  business  that  has 
been  built  upon  that  individual's  personal  merit.  Of  course, 
there  are  exceptions,  as  in  trademarks,  and  so  forth.  The  pur- 
chaser of  the  business  must  then  bear  in  mind  that  in  acquiring 
the  good  will,  a  certain  expense  will  be  incurred  to  replace  the 
service  of  the  individual. 

In  the  present  case  the  final  excess  of  receipts  over  costs 
was  $226,026.95  during  a  period  of  11  years  and  4  months. 
Thus  the  average  net  profit  was  $19,943.55  per  year.  The  cap- 
ital consisted  of  $60,000,  divided  as  follows:  J.  W.  Smith, 
$20,000;  B.  F.  Smith,  $15,000;  A.  C.  Smith,  $12,500;  F.  C. 
Smith,  $12,500. 

The  fixed  interest  charge  upon  this  capital  at  5%  would 
amount  to  $3,000.  The  company  had  no  bonded  or  floating 
indebtedness  other  than  current  and  promptly  paid  bills.  No 
further  interest  for  capital  borrowed  or  used  need  be  considered. 

We  have  next  to  consider  the  services  rendered  by  the  four 
individuals.  J.  W.  Smith  acted  as  an  "outside"  man.  In 
short,  he  secured  the  business,  and  a  man  acting  in  that  capa- 
city is  generally  one  of  value.  We  estimated  his  services  as 
worth  $1,700  per  year.  B.  F.  Smith  acted  as  bookkeeper.  A 
bookkeeper  sufficiently  good  to  carry  on  the  accounts  of  the 
company  could  be  secured  for  $1,500. 

A.  C.  Smith  acted  as  superintendent  of  construction.  As 
much  of  the  value  of  the  company  insofar  as  reputation  is 
concerned  was  without  a  doubt  due  to  good  work  performed  in 
the  past,  it  would  have  required  a  good  superintendent  to  have 
replaced  the  one  whose  services  would  be  lost  were  the  company 
and  its  entire  good  will  to  be  sold.  We  therefore  showed  A.  C. 
Smith's  services  as  worth  $3,700  a  year. 


190  BUSINESS  ACCOUNTANCY 

F.  C.  Smith  acted  as  an  assistant  in  the  office.  An  excel- 
lent assistant  could  be  secured  for  $900  a  year. 

It  may  be  remarked  that  the  salaries  of  the  solicitor  and  the 
superintendent  are  low,  but  we  did  not  seek  to  replace  those 
individuals  with  exceptionally  qualified  men.  It  was  simply 
intended  to  quote  the  prices  of  an  average  man  in  such  a  position, 
as  any  ability  over  and  above  the  average  would  in  the  future 
reflect  itself  in  an  excess  of  earnings. 

A  further  fact  to  be  taken  into  consideration  is  that  a  business 
which  requires  its  proprietor  or  proprietors  to  expend  in  its 
management  a  considerable  amount  of  time  and  skill  is  less 
valuable  than  one  which  will  produce  an  equal  income  without 
such  expenditure.  It  is  less  valuable  because  unquestionably  it 
will  be  found  that  in  the  open  market  it  would  realize  less 
money,  but  in  addition  to  that  it  is  important  to  remember 
that  when  a  man  purchases  good  will  he  pays  for  something 
which  places  him  in  the  position  of  being  able  to  earn  more 
money  than  he  would  be  able  to  earn  by  his  own  unaided 
exertions.  In  the  above  case,  the  cost  of  management  was 
based  upon  a  fair  average  cost  for  the  replacing  of  the  purely 
physical  ability  of  the  individuals  concerned. 

It  is  safe  to  take  the  life  of  the  good  will  of  a  contractor  at 
10  years.  Capitalizing  for  this  period  it  becomes  necessary  to 
deduct  the  amount  of  combined  interest  necessary  to  pay  the 
purchaser  for  the  loss  of  interest  upon  the  sum  paid  for  good 
will,  inasmuch  as  he  is  anticipating  the  expected  net  profit  by 
paying  in  advance  for  the  entire  good  will  of  the  company. 
This  amount  at  compounded  interest  is  $55,479.21  as  the  value 
of  the  good  will  of  the  business. 

Placing  Good  Will  on  the  Statement.  There  is  no 
proper  objection  to  the  appearance  of  the  item  good  will  upon  a 
statement  of  condition  if  the  item  has  been  properly  valued. 
Just  the  other  day  a  great  corporation  added  $2,000,000  to  its 
statement  under  the  head  of  good  will,  and  the  most  conservative 
bankers  and  investors  agreed  that  the  new  asset  was  fully  worth 
that  figure. 

The  company  did  not  need  the  addition  in  order  to  make  a 
good  statement  and  it  was  not  asking  for  more  than  its  usual 
borrowings,  but  it  stated  that  a  trade  name  which  it  had  adopted 
for  its  product  and  which  had  been  extensively  advertised, 
gave  the  company  an  excess  earning  power  over  that  which 


FIGURING  GOOD  WILL  igi 

would  commonly  be  earned  on  its  capital  in  an  amount  which 
was  conservatively  represented  by  the  addition  of  $2,000,000 
to  its  assets.  The  company  refined  a  standard  commodity, 
which  had  never  previously  been  sold  as  other  than  an  ordinary 
commodity,  added  its  own  characteristic  trade  name  and  thus 
individualized  the  product. 

Can  a  new  company  have  a  good  will?  In  general  it  cannot 
because  there  exists  no  record  of  performance  on  which  to 
value  the  good  will.  But  there  are  exceptions;  if  the  new  com- 
pany starts  with  a  staff  of  tried  salesmen  from  another  company 
in  the  same  line,  those  salesmen  may  have  a  personal  good  will 
which  can  be  charged  into  the  new  concern;  the  exact  value  is 
very  difficult  indeed  to  appraise.  If  the  salesmen  have  been  given 
bonuses  to  come  with  the  new  enterprise,  the  amount  thus  paid 
might  sometimes  be  taken  as  good  will,  but  the  exact  make-up 
of  the  item  should  be  set  forth  so  that  it  cannot  deceive. 

Furthermore  the  value  of  any  salesman  over  and  above  other 
salesmen  may  be  capitalized  in  the  same  manner  as  with  excess 
profits  due  to  good  will,  being  careful  to  deduct  the  amount 
which  it  is  estimated  that  an  ordinary  salesman,  without  peculiar 
personal  connections,  might  earn  for  the  company. 

If,  however,  the  new  company  has  purchased  the  good  will 
of  another  business,  then  it  is  proper  in  the  first  year  to  charge 
this  good  will  at  the  amount  paid  for  it.  After  the  first  year, 
the  actual  figures  of  the  earning  power  of  the  asset  should  be 
taken  on  the  performance  records  and  the  purchase  price  dis- 
carded. A  trademark  may  be  valued  in  the  general  good  will, 
although  it  is  better  accounting  to  set  it  up  as  a  distinct  asset;  but 
a  trade  name  is  always  part  of  the  good  will.  The  distinction  is 
made  because  a  trademark  is  a  monopoly  granted  by  the  govern- 
ment while  a  trade  name  is  a  product  of  good  will. 


CHAPTER  Xm 

CHARGING  OFF  DEPRECIATION  ON 
THE  RIGHT  BASIS 

IN  the  chapter  on  "Balancing  the  Books"  the  correct  method 
of  taking  an  inventory  was  discussed,  also  the  necessity  for 
keeping  the  book  value  of  stock  at  its  actual  value,  or 
certainly  at  not  more  than  its  actual  value.  It  was  there  seen 
that  it  became  necessary  at  times  to  lower  the  inventory  prices 
because  the  stock  or  a  portion  of  it  had  become  obsolete,  or 
shop-worn,  or  was  otherwise  unsalable  at  its  former  value. 

That  process  is  sometimes  termed  "depreciating"  the 
inventory,  but  although  from  the  standpoint  of  correct  English 
the  term  is  entirely  accurate,  the  word  "depreciation"  in 
accountancy  has  a  technical  meaning  and  is  confined  to  the 
process  by  which  the  fixed  assets  are  lowered  in  value  so  that 
their  price  on  the  books  will  always  represent  their  operating 
worth.  Stock  is  ■ '  reinventoried ' '  instead  of  being ' '  depreciated ' ' ; 
this  is  really  a  distinction  with  a  difference. 

Why  Depreciate  Equipment?  Look  at  the  reasons.  The 
machinery  and  fixtures  of  any  concern  are  the  tools  with  which 
it  does  business;  they  do  not  go  into  the  cycle  of  trade  and  are 
not  offered  for  sale  unless  the  concern  goes  into  liquidation 
(barring,  of  course,  the  ordinary  matter  of  replacing  with  a 
better  article).  Three  methods  of  valuation  may  conceivably 
be  used  to  estimate  their  value : 

1.  The  cost  of  replacement  value. 

2.  The  operating  worth — what  they  are  worth  to  the  going 
concern. 

3.  The  forced  sale  or  liquidation  value. 

The  replacement  value  cannot  be  the  true  value  to  keep  on 
the  books,  as  it  may  vary  with  the  market;  at  the  time  when 
this  book  is  being  written  the  prices  of  second-hand  machinery 
are  above  those  of  new  machinery  three  years  ago.    But  we  buy 

192 


DEPRECIATION  193 

machinery  or  buildings  or  fixtures  for  the  purpose  of  doing 
business  and  not  to  resell;  hence  the  market  price,  be  it  above  or 
below  the  cost  price,  can  have  no  effect  on  us,  for  the  articles 
can  be  worth  to  us  in  an  operating  sense  only  what  was  paid  for 
them  less  the  toll  taken  by  usage  or  the  quick  lessening  in 
operating  worth  through  the  invention  of  better  articles  which 
will  give  cheaper  manufacturing  costs. 

The  same  argument  disposes  of  the  third  system  of  valuation 
— the  forced  sale  value.  In  ordinary  times  and  for  most  kinds 
of  fixtures  a  forced  sale  will  seldom  bring  more  than  50%  of  the 
cost  price.  But  a  business  is  making  ready  to  live  and  not  to 
die;  the  value  as  a  corpse  is  only  for  the  auction.  Plainly 
the  true  value  of  the  fixed  assets  is  what  they  are  worth  to  the 
going  concern  and  this  value  is  termed  the  "operating  worth." 

The  Operating  Worth.  The  operating  worth  is  had  by 
the  application  of  the  process  of  depreciation  and  the  consequent 
setting  up  of  a  reserve.  The  operating  worth  plus  the  reserve 
should  always  equal  the  original  cost,  which  original  cost  includes 
that  of  installation  as  well  as  purchase  price — for,  to  repeat,  it  is 
only  the  value  to  the  going  concern  in  which  we  are  interested. 

Since  the  proper  rate  of  depreciation  must  depend  upon  the 
life  of  the  article,  determining  that  rate  is  an  engineering  and 
not  an  accounting  affair.  The  accountant  can  take  only  the 
figures  which  are  given  to  him  and  it  is  for  the  engineers  to  find 
the  actual  percentage  which  is  to  be  deducted.  All  that  the 
accountant  can  say  is  that  there  must  be  some  figure  for  the 
inevitable  impairment  in  value.  This  value  cannot,  of  course,  be 
determined  by  mere  guess  and  neither  can  it  ever  exceed  the 
price  which  was  paid  in  the  first  instance.  In  very  rare  cases 
will  the  value,  after  years  of  use,  be  that  of  the  original  cost; 
but  there  can  be  such  cases. 

No  Arbitrary  Percentages.  I  have  often  been  asked: 
"What  is  the  conservative  rule  for  depreciation?" 

There  is  no  rule;  when  you  consider  that  the  object  of  depre- 
ciation is  to  keep  constant  the  relation  between  the  inventory 
value  of  fixtures  and  the  operating  worth,  it  can  readily  be  under- 
stood that  an  exact  rule  is  impossible.  The  very  statement  of  a 
rule  is  an  absurdity,  as  the  government  soon  discovered  after 
they  fixed  5%  as  a  constant  for  depreciation  charges  in  making 
up  the  corporation  tax  returns.  They  found  that  in  some  cases 
the  rate  was  far  too  high  and  in  others  much  too  low. 


1W  BUSINESS  ACCOUNTANCY 

Because  depreciation  cannot  have  rules,  the  percentage 
to  be  deducted  is  not  for  the  accountant  to  determine,  but, 
since  the  owner  must  often  be  both  his  own  engineer  and 
accountant,  he  should  have  a  guide  in  making  his  balance  sheet 
a  true  exhibition  of  the  state  of  his  business.  Unless  the  balance 
sheet  be  true,  the  profits  cannot  be  truly  determined;  too  much  or 
too  little  depreciation  will  result  in  equally  false  balance  sheets. 

Everyone  agrees  that  it  is  good,  conservative  business  to 
charge  off  depreciation,  but  right  here  all  agreement  stops. 
The  average  business  man  depreciates  drastically  in  the  good 
years  and  not  at  all  in  the  bad  years — he  apologizes  that  things 
will  about  even  up  in  the  end;  as  a  matter  of  fact  he  really 
depreciates  according  to  the  amount  that  he  wants  to  have  as 
surplus;  and  the  determining  factor  in  his  rate  of  depreciation, 
or,  in  fact,  in  the  existence  of  any  depreciation,  is  the  net  income 
from  operations.  If  he  can  make  a  good  showing  with  depre- 
ciation, he  depreciates;  if  not,  he  does  not  depreciate. 

Emotional  Depreciation.  The  real  rate  of  depreciation 
is  seldom  of  the  slightest  concern.  Yet  costs  and  profits  are  so 
intimately  bound  up  with  the  worth  of  the  plant  and  machinery 
that  without  an  accurate  worth  being  ascertained,  the  costs  and 
the  profits  can  only  be  approximated.  Probably  it  is  better  to 
depreciate  too  much  rather  than  not  at  all,  but  certainly  there 
is  no  virtue  in  excessive  writing  off. 

Take  a  case  in  point.  A  company  manufacturing  an  auto- 
mobile accessory  made  profits  at  the  rate  of  20%  during  the 
first  three  years  of  business;  they  wrote  off  10%  on  machinery 
and  the  same  amount  on  their  patents.  In  the  fourth  year  their 
patents  were  legally  broken  down  and  their  earnings  dropped 
to  5%.  They  stopped  writing  off  and  the  next  year  they  sold  out. 
Of  course  there  was  a  deal  of  haggling  on  the  price,  but  finally 
they  agreed  to  the  inventory  value  as  the  selling  price  and  a 
new  company  came  in. 

The  purchasers  had  the  whole  plant  reappraised  and  it  was 
found  that  the  three  years  of  excessive  depreciation  had  not 
been  made  up  by  the  two  years  when  nothing  was  charged  off, 
and  that  the  former  stockholders  had  cheated  themselves  on  the 
price.  It  is  not  often  that  machinery  depreciates  as  much  as 
10%  a  year.  On  the  other  hand,  insufficient  depreciation  will 
result  in  apparent  profits  which  are  too  large  and  will  also  cost 
too  much  in  taxes. 


DEPRECIATION  195 

The  Basis  for  Depreciation.  Two  grounds  for  deprecia- 
tion exist — one  through  the  wear  and  tear  of  usage  and  the  other 
through  the  invention  of  better  machinery,  which  renders  the 
installed  machines  obsolete.  The  rate  for  the  first  kind  is  plainly 
to  be  determined  on  the  life  of  the  machine  if  it  always  be  kept 
in  good  repair;  hence  the  figures  must  be  empirical.  The  obso- 
lescence is  to  be  determined  only  by  comparison  with  the  latest 
that  is  on  the  market. 

Obsolescence.  Take  two  extreme  cases.  There  has  been 
little  advance  in  the  machines  for  nut  and  rivet  making  through 
many  years;  such  a  machine  will  last  fully  40  years  if  the  parts 
are  replaced  and  repairs  are  given  earnest  attention;  in  fact  it  is 
claimed  that  an  older  machine  is  better  than  a  new  one  because 
it  has  been  loosened  up  and  so  works  more  easily.  Two  per 
cent  is  a  liberal  depreciation.  Concrete  mixers,  on  the  other 
hand,  seldom  outlast  the  contract,  for  the  exposure,  the  rough 
usage  and  the  loss  of  vital  parts  make  it  necessary  often  to 
abandon  the  machine  at  the  end  of  the  contract.  Three  to 
four  years  is  a  long  life;  hence  the  depreciation  will  go  from 
25%  to  33%. 

There  is  no  obsolescence  to  be  charged  on  the  rivet  machines 
and  the  life  of  the  concrete  mixer  is  so  short  that  it  would  scarcely 
pay  to  bother  replacing  with  a  newer  design  unless  it  were 
revolutionary.  But  since  obsolescence  is  a  matter  of  comparison 
and  not  of  reasoning,  the  charge  may  vary  from  zero  to  100%. 
When  a  bottle  machine  was  invented  a  few  years  ago  with  a 
capacity  eight  times  that  of  the  machines  in  use,  it  became  neces- 
sary for  every  bottle  maker  to  charge  off  his  machines  in  their 
entirety.  The  same  thing  happened  when  the  improved  shoe 
machines  came  in.  In  both  these  cases  the  value  of  the  older 
machinery  was  only  that  of  scrap.  But  if  the  newer  types  are 
only  slightly  better  than  those  already  installed  the  percentage 
of  depreciation  for  obsolescence  becomes  correspondingly  small; 
if  the  new  machines  have  an  output  10%  better  than  the  old, 
then  10%  should  be  taken  off  the  inventoried  machine  and  no 
further  deduction  made  for  this  reason  until  another  improvement 
be  made.  The  point  at  which  to  stop  depreciation  for  obsoles- 
cence is  when  the  newer  machines  are  so  much  more  efficient 
than  the  old  that  good  manufacturing  demands  a  replacement; 
then  the  whole  book  value  of  the  machine  is  automatically 
charged  off.     This  is  the  only  fair  method. 


196  BUSINESS  ACCOUNTANCY 

Plant  Ledgers.  Every  new  plant  should  keep  a  plant 
ledger  or  machine  depreciation  record  (a  form  of  each  of  which  is 
shown  in  Form  67  and  Forms  68  and  69.)  The  principles  of  the 
forms  are  exactly  alike  and  there  is  nothing  to  choose  between 
them.  Each  article  of  machinery  has  its  own  card  containing 
its  own  statistics;  the  value  of  the  new  machine  is  the  purchase 
price  plus  the  cost  of  installation.  The  cost  of  the  machine  as 
it  first  stands  is  the  exact  replacement  value.  The  practice  of 
charging  machinery  at  the  purchase  price  less  the  seller's  profit 
is  harking  back  to  the  idea  that  auction  values  are  real  values. 

The  expected  life  of  the  machine  is  then  entered;  the  term  of 
life  will  be  calculated  from  past  performance  of  similar  machines. 
The  figures  will  be  compiled  from  the  shop  in  the  older  factory 
and  from  the  best  information  obtainable  in  the  case  of  the  new; 
the  makers  will  usually  be  able  to  estimate  the  life  with  fair 
accuracy.  Most  lathes  will  give  25  years  of  service;  the  depre- 
ciation would  therefore  be  4%;  a  sandblast  will  commonly 
last  20  years,  hence  the  figure  here  is  5%. 

In  the  spaces  provided,  the  amount  of  each  year's  deprecia- 
tion is  entered  so  that  the  card  at  all  times  gives  the  net  worth 
of  the  machine  to  the  concern.  No  figure  for  obsolescence  is 
given,  because  it  cannot  be  assumed  that  a  better  design  will  be 
available  until  it  is  actually  known  that  such  has  been  made. 
The  obsolescence  therefore  will  be  determined  annually  or  of tener 
by  an  examination  of  whatever  is  on  the  market  and  will,  of 
course,  vary  for  each  article. 

The  repairs  and  maintenance  charges  are  also  entered  on  the 
cards  and  form  performance  records  of  great  value  in  purchasing 
new  machines  and  they  also  give  timely  warning  when  a  machine 
is  costing  so  much  for  repairs  that  it  had  better  be  scrapped. 

Depreciating  Old  Installations.  When  the  plant  is  old 
and  no  proper  depreciation  records  have  been  kept,  the  best 
plan  is  to  appraise  the  machinery  in  toto  at  its  original  cost  and 
in  this  operation  the  original  prices  should  be  had  together  with 
costs  of  installation.  If  they  cannot  be  had  exactly  from  the 
records,  then  they  should  be  estimated.  The  present  values  are 
reached  by  depreciating  from  the  old  values.  In  Forms  70  and 
71,  shown  on  Inserts  VIII  and  IX,  the  manner  of  formally  stat- 
ing the  values  of  older  plants  is  given.  When  these  values  have 
been  arrived  at  the  plant  ledger  is  started  with  the  final  figures 
obtained  and  additional  data  placed  on  the  cards  as  desired. 


INSERT  VIII 

FORM  70,  described  on  page  196 


A 


- 


SUMMARIZED   STATEMENT 

of   the  ESTIMATED  REPRODUCTION  COST  and   the  APPRAISED  OPERATING  WORTH 

OF   THE  WORKS  of   the 

COMPANY 

as  of  December  31>    19  — 

PLANT     AND     PROPERTY 

I  .  BEAM  HOUSE  GROUP 

II.   TA1 

HOUSE 

III.   MAIN  PLANT 

IV.   WAREHOUSE  GROUP 

TOTALS 

Reproduction 

Operating 

Reproduction 

Operating 

Reproduction 

Operating 

Reproduction 

Operating 

Reproduction 

Operating 

Dep'n     Charged 
Against  Repro- 
duction Cost 

Average 

Percentage 

Dep'n 

Cost 

Worth. 

Cost 

Worth 

Cost 

Worth 

Cost 

Worth. 

Cost 

Worth 

Real  Estate 

15 

500 

00 

15 

500 

00 

15 

000 

00 

15 

000 

00 

3g 

000 

00 

15 

000 

00 

7 

250 

00 

7 

250 

00 

72 

750 

00 

72 

750 

00 

Buildings 

TOTAL  Real  Estate  and  Buildings 
Building  Equipments 

36 

20j 

00 

33 

5«9 

00 

26 

372 

00 

25 

556 

00 

118 

969 

00 

100 

562 

00 

51 

284 

00 

32 

394 

00 

232 

828 

00 

192 

101 

00 

40 

727 

00 

17# 

51 

703 

00 

49 

089 

00 

41 

372 

00 

40 

556 

00 

153 

969 

00 

135 

562 

00 

58 

534 

00 

39 

644 

00 

305 

578 

00 

264 

851 

00 

40 

727 

00 

3.3* 

3 

170 

00 

2 

?85 

00 

3 

2l* 

00 

3 

l5i 

00 

15 

479 

00 

12 

480 

00 

3 

210 

00 

2 

187 

00 

25 

113 

00 

20 

801 

00 

4 

310 

00 

175* 

Machinery  and  Mechanical  Equipments 

8 

960 

00 

7 

852 

00 

25 

J80 

00 

22 

498 

00 

82 

625 

00 

63 

210 

00 

116 

965 

00 

8 

"560 

00 

23 

405 

00 

20# 

Power  Generation   and  Transmission 

1 

«5 

00 

1 

110 

00 

9 

163 

00 

8 

J44 

00 

47 

iyo 

00 

3V 

iyt 

00 

S9 

748 

00 

650 

00 

11 

098 

00 

20% 

Factory  Machinery  Piping  Systems 

6l8 

00 

565 

00 

4 

077 

00 

3 

852 

00 

2 

359 

00 

2 

j.yo 

00 

7 

054 

00 

6 

587 

00 

467 

00 

6% 

General  Operating  Equipment   and  Tools 

l'-i 

491 

00 

11 

740 

00 

4 

781 

95 

J 

49b 

00 

5 

881 

14 

4 

363 

00 

24 

154 

29 

19 

599 

00 

4 

555 

29 

\9% 

Machine   Spare  and  Repair  Parts 

i 

790 

30 

i 

254 

00 

3 

345 

50 

3 

052 

00 

1 

985 

00 

1 

107 

00 

9 

120 

80 

7 

4M 

00 

1 

707 

80 

19% 

Office  Furniture,    Fixtures   and  Equipment 

1 

752 

00 

1 

381 

00 

1 

752 

00 

1 

381 

00 

m 

00 

22# 

Stable  and  Trucking  Equipments 
TOTAL  Equipments 

TOTAL  PLANT  AND  PROPERTY 

3 

235 

00 

2 

813 

00 

3 

235 

00 

2 

813 

00 

422 

00 

13* 

29 

634 

00 

26 

252 

00 

50 

446 

25 

44 

595 

00 

158 

631 

84 

123 

852 

00 

8 

430 

00 

6 

107 

00 

247 

142 

09 

200 

806 

00 

46 

336 

09 

19# 

81 

337 

00 

75 

341 

00 

91 

818 

25 

85 

151 

00 

312 

600 

84 

259 

414 

00 

66 

964 

00 

45 

751 

00 

552 

720 

09 

465 

657 

00 

87 

063 

09 

16* 

EQUIPMENT : 

Works  are   thoroughly   equipped  throug 

with  most  modern  machinery  and  appli 

ances. 

AGE:   Group 

1.      Built  about  1   1/2  years  ago,    excepting 

4      Equipment   from  6  months   to   10  years  old. 

part  of  liming  and  unhairing  department 

REAL  ESTATE:            2   3/5  acres    in    center  01 

city    in  buiH 

-up 

All  maintained   in  first   class  operat 

ing 

which  is   4  years  old. 

workingmen's   residentia: 

section    three 

blocks 

condition. 

Group 

LI.      Built   and  finished  1  year  ago. 

from  Public   Square  and  Main   Street.    (H 

ain 

Group   111.      Ground   floor  about  10  years  old;    2nd  an 

d 

business   street) . 

CAPACITY  OF 
WORKS : 

1,500   to   1,800   dozen   finished   skins 

per 

3rd  floors  on  11th   Street  and  part  of 
Poplar  Street  are  5  years  old;    2nd  and 

BUILDINGS:                 Ground  area    -   2   1/3   acre 

s 

24  hours. 

3rd  floora  on  12th  Street  and  part  of 

Floor  area   -  4  acres 

Poplar   Street   are  1  1/2  years  old. 

Designed  by   architects; 

of  heavy   slow 

burning 

NUMBER  OF 

Group 

IV.      Machine   shop   and  Warehouses  18  to   20  years 

mill   type;    of    substantie 

1   constructior 

and   in 

EMPLOYEES : 

Average  875  running   under  ordinary   full 

old.    Stables   1  year  old. 

first   class   condition. 

capacity. 

r\ 


Depart 
UnltNi 

moi 

PUNT  LEDGER 

C  InaxIflMtlnn         , 

■ma 

, .,/' 

lUI 

Unit  No. 

Lite 

Voucher  No. 

Value 

Annual  Depreciation 

f=o 

1918 

1917 

1918 

1919 

1920 

1921 

1922 

1923 

1924 

1929  | 

FORMS  67-68-69:     Plant  ledgers  or  ma- 
chine depreciation  records  such  as  shown 
here  are  effectively  used  in  many  plants. 
Each  machine  has  its  own  card  containing 
its  own  statistics.    The  value  of  the  new 
machine  is  the  original  price  plus  the  cost 
of  installation.     The  principles  of  the  three 
forms  are  exactly  alike  and  there  is  little 
or  no  choice  between  them   in  practice. 

Balance  Forward 

Deduct 

Depreciated  8a 

mw 

New   Insulation 

|             | 

Balance  Ferward 

Repalre 

'          ' 

MACHINE  DEPRECIATION  RECORD 

Marhlnn  No.                                      Lmvtlnn 

!=(  ) 

Purchased 
Date  Purch 

from 

atari                                                 Prlra 

otalC 

Llfa 

tut 

riMKrlntlnn 

REPAIRS  AND  MAINTENANCE  CHAI 

Year 

Jin. 

Feb. 

Mar. 

Apr. 

May 

June 

1916 

1111 

1917 

1918 

1919 

1920 

1921 

1922 

Annual  Depreciation 

1923 

1918 

192S 

1924 

1016 

1928 

1925 

1928 

1917 

1927 

1927 

1918 

1928 

1928 

1919 

1929 

1929 

1920 

1930 

)930 

1921 

1931 

1931 

1922 

1932 

1(32 

1923 

1933 

1833 

1934 

1*24 

1934 

197 


198  BUSINESS  ACCOUNTANCY 

Small  tools  such  as  reamers,  drills,  jigs,  and  the  like,  are  not 
to  be  neglected  in  the  plant  ledger.  Here  the  performance 
records  of  the  purchasing  department  are  of  great  value.  The 
best  practice  is  to  charge  the  original  purchases  as  plant  additions 
and  depreciate  each  article  or  kind  of  article  at  the  rate  ascer- 
tained from  the  records.  New  tools  which  merely  replace  the 
old  are  charged  to  expense,  but  new  tools  which  are  required  in 
the  making  of  new  lines  and  which  do  not  replace  tools  already 
in  hand  are  added  to  the  inventory  as  they  are  purchased. 

The  Depreciation  of  Buildings.  Buildings,  of  course, 
depreciate,  but  the  degree  depends  upon  the  material  of  con- 
struction, the  attention  to  upkeep,  and  the  climate.  There  is 
also  a  depreciation  for  obsolescence,  but  this  is  seldom  taken 
into  consideration  and  neither  is  the  possibility  of  new  railway 
connections  on  other  sites,  or  like  elements  which  undoubtedly 
serve  to  lessen  value.  Some  buildings  in  New  England  have 
housed  mills  for  80  years  or  more  and  are  still  well  suited  to 
their  purposes — so  well  suited  that  perhaps  it  would  not  be 
economy  to  abandon  them  for  new  structures.  On  the  other 
hand,  many  companies  do  reach  the  point  where  they  decide  that 
conditions  have  so  changed  that  it  would  pay  to  erect  a  new 
plant  on  a  new  site. 

Life  of  Structural  Types.  A  conservative  architect  has 
given  the  following  life  terms  for  these  six  types  of  standard 
construction: 

1.  Mill  construction,  brick-bearing  walls,  wood  floors  and 
roof  construction:    40  years. 

2.  Steel  cage,  brick  curtain  walls,  reenforced  concrete 
floors:    30  years. 

3.  Brick-bearing  walls,  steel  beams  for  floors  and  roofs, 
timber  flooring  and  roofing :    25  years. 

.  4.     Reenforced  concrete  throughout:    at  least  40  years,  and 
probably  more. 

5.  All  timber:    25  years. 

6.  One-story  structure,  steel  or  wood  frame,  galvanized 
covering:    5  to  10  years. 

From  these  approximate  terms,  the  annual  depreciation  may 
easily  be  calculated,  but  it  will  be  accurate  only  if  the  repairs  are 
diligently  attended  to  and  the  climate  is  not  too  rigorous. 


INSERT  IX 

FORM  71,  described  on  page  196 


Details  of  Equipment  Valuation  of   the  Rit 
and  of   the  Tack   and  Nail  Departments 
----  —  .  .  Company 


(Ii^chines   ore    designated  by  number. 
Appraisal    in  which   detailed   desci 
found. ) 


Depreciation 

Depreciation 

Percentage   and 

Percentage  and 

Last  Appraisal 

Appraisal 

as  of 
May  27.    19-- 

TACK  AND  KAIL  DEPARTMENT 

GROUP      A 

MACHINES    (Including   counter   shafts) 

No.  61   to   70   inclusive,    10  Wright   iron   tumbling 

» 

barrels 

* 

600 

30* 

00 

403 

0  0 

28* 

2V(I 

00 

72  Wright  040/D  nail  machines 

438 

26!! 

J1H 

,c 

73  Wright   44"    squaring   shear 

395 

30* 

10 

74  Wright  power   shear 

70 

30* 

4, 

00 

75  White   speed  lathe 
76   to   85   inclusive,    10  Wright   automatic  nail 

74 

30* 

» 

bo 

machines    5/6" 

2 

070 

00 

30* 

1 

499 

00 

86   to   95   inclusive,    10  Wright  automatic  nail 

machines   -  1"    cap 

2 

580 

00 

30* 

1 

B06 

00 

96  Wright   automatic  nail  machines   -  2" 

385 

00 

305! 

26  0 

so 

97  Emery  grinder 

98  Emery  grinder 

49 

00 

45* 

26 

OS 

49 

00 

45* 

26 

^ 

99  Elevator    (omit) 

7 

113 

CO 

29* 

4 

081 

06 

10* 

4 

269 

96 

New              Nail  machine 

411 

10 

4 

681 

10 

GROUP      C 

E/#4  Hanson  20"    forge 
SHAFTING    -    (materials  only:    no    instalation) 

22 

50 

4555 

12 

je 

10)2 

10 

13 

5.7  Main   shaft   125' 

5.8  Counter   shaft  of   tumblers   76' 

199 

bl 

GROUP      D 

106 

"5 

306 

06 

18** 

249 

.1-1 

4* 

237 

20 

PULLEYS   .    (materials  only;   no    instalation) 

On  S.7  Twenty. aeven    (2   elevator  pulleys 

omitted) 

g 

95 

23±* 

GROUP     E 

S.8  Thirteen  pulleys 
New  on   S.8  24"   x  12   Iron  pulley 
BELTING 

7° 

126 

71 

23i* 

96 

9  j 

6* 

89 

5 

33 

26 

94 

59 

On  S.7  Twenty-six  belts    (2   elevators 

omitted) 

155 

44 

GROUP      P 

S.8  Twelve  beltB 

New  on   S.8  to   new  nailer  20'    -  6"    single 
leather  belt 

TOOLS 

69 

02 

225 

06 

35? 

146 

29 

146 

9 

29 

60 

156 

09 

50  Cutters   for  nail  machines 

70 

00 

1   Scoop   shovel 

1 

00 

1  Johnson   4J-"   vise 

6 

or 

1  Hanley  135  pound  anvil 

14 

H7 

2  Knives   for  aquare   shear 

17 

00 

GROUP     G 

1  Clarke  drill   chuck 

PUNCHES  AND  DIES 
(none) 

7 

00 

116 

-5 

16±* 

97 

34 

97 

34 

GROUP     H 

DUST  COLLECTOR   SYSTEM 

GROUP      I 
GROUP      J 

No.   60         Blower  and  piping  complete  at 
tumbling  barrels 

TANKS 

1   30"   x  60"   x  i"    iron  tank 

TRUCKS 

84 

61 

45* 

46 

54 

10* 

38 

08 

27 

00 

5* 

25 

65 

20* 

20 

25 

2   2-wheel   box    trucks,    14"    x   18" 

wood  platform 

5 

0(1 

30* 

1  12"   nose.N.Y.  pattern  half 

Iron  truck 

2 

00 

12£* 

1  Wheel  handy   truck 

2    1  25 

40* 

1 

35 



9    1  25 

28* 

b 

60 

40* 

2 

90 

DEPRECIATION  199 

Real  Estate.  Real  estate  may  depreciate  and  also  it  may- 
appreciate,  but  it  is  not  advisable  to  take  either  into  consideration 
unless  the  changes  are  great,  for  the  value  to  the  going  concern 
is,  after  all,  only  that  which  was  laid  out  and,  unlike  a  building 
or  a  machine,  it  will  not  be  replaced  unless  the  plant  site  be 
shifted. 

Appreciation.  Machinery  and  fixtures  should  never  be 
appreciated;  the  maxim  that  profits  are  made  through  sales 
and  not  through  book  entries  is  sound.  Reasoning  by  analogy,  if 
machinery  increases  in  value  it  should  be  carried  at  higher 
values,  but  the  practical  value  to  the  going  concern  is  not 
thereby  increased,  and  it  is  only  the  going  concern  which  we 
are  treating.  Hence,  appreciating  machinery  is  not  on  the  same 
plane  as  depreciating;  for,  through  wear  and  tear  or  obsolescence, 
the  machine  may  be  worth  less  than  it  cost,  but  it  can  never  be 
worth  more  unless  it  be  taken  out  of  the  shops  and  sold. 

If  realty  values  have  increased  and  an  outside  appraisal 
clearly  demonstrates  the  fact,  the  prices  may  be  marked  up, 
but  it  is  better  business  not  to  do  so;  for  here  again  profits  will 
be  declared  out  of  unliquidated,  estimated  accretions,  whereas 
a  manufacturing  enterprise  is  supposed  to  make  its  profits  out 
of  stock  turned  and  not  out  of  realty  speculation.  Marking  up 
real  estate  is  a  little  like  counting  chickens  before  they  are 
hatched. 

I  have  tried  to  make  it  clear  that  no  fixed  figures  for  deprecia- 
tion should  be  adopted  throughout  any  plant,  but  that  each 
machine  should  present  its  own  case  and  receive  its  own  sentence. 
If  for  any  reason  the  exact  figures  cannot  be  had,  a  fairly  safe 
estimate  is  2%  on  buildings,  5%  on  machinery,  and  10%  on  small 
tools.  But  the  best  business  man  will  not  guess;  he  has  the 
means  at  hand  to  know — and  he  will  know. 


CHAPTER  XIV 

WHAT  YOUR  STATEMENT  OF 
OPERATION  MEANS 

THE  statement  of  condition  answered  the  question  of  the 
business  man,  "Where  am  I  at?"  The  statement  of  opera- 
tion is  the  reply  to  "How  did  I  get  there?"  or  to  put  it 
differently,  "How  did  I  make  my  profit?"  or  if  the  result  be  red 
instead  of  black,  "Why  did  I  lose  my  money?" 

Of  course  the  interest  of  the  business  man  is  in  making  a 
profit — unless  profit  be  the  ultimate  end,  the  enterprise  is  not 
to  be  considered  as  a  business — and  it  is  in  the  statement  of 
operation  that  we  for  the  first  time  get  down  to  the  discussing 
of  the  "how"  and  the  "why"  of  profits.  Every  preceding 
account  has  been  provided  with  the  view  of  giving  a  hold  on  the 
operations  which  go  to  the  making  of  a  profit,  so  that  when  we 
finally  discover  that  we  have  made  either  a  profit  or  a  loss,  we 
may  trace  back  that  profit  or  loss  to  its  source. 

The  profit  was  shown  in  the  statement  of  condition  as 
"surplus."  The  statement  of  operation  is  a  dissection  of  the 
surplus  because  the  surplus  was  created  by  the  operation  of  the 
business. 

The  statement  of  condition  exhibited  the  profit  only  in  bulk, 
and  many  business  men — too  many — are  content  to  take  the  lump 
figure  thus  expressed  without  a  thought  as  to  where  it  had  its 
genesis.  Such  men  have  no  use  for  the  statement  of  operation 
or  for  any  other  statement  which  is  a  record  of  that  which  is 
done  and  finished.  To  those  who  do  not  care,  the  statement  of 
operation  is  recommended  as  a  rough  analysis  which  may  counter 
disaster;  to  those  who  really  want  to  know  how  and  why  they 
make  money,  it  is  commended  as  an  introduction  to  the  science 
of  cost  accounting. 

The  statement  of  operation  is,  strangely  enough,  unknown 
to  most  business  men.  Yet  it  is  comparatively  simple  to  make  up 
from  the  records  which  every  reasonably  well-conducted  business 

200 


OPERATING  STATEMENTS  201 

should  have,  and  its  results  may  be  far-reaching.  But  it  is 
offered  at  the  best  only  as  a  substitute  for  something  better — 
an  accurate  cost  system.  The  statement  should  be  known  and 
should  be  compiled,  but  it  should  be  recognized  only  as  a  sub- 
stitute for  a  cost  system  and  never  taken  as  a  cost  system  in  itself. 

The  Value  of  a  Statement  of  Operation.  As  has  been 
constantly  reiterated,  accounts  make  for  profits  only  when  they 
are  used  for  comparative  purposes.  A  single  figure,  standing 
alone,  means  little;  but  taken  in  connection  with  a  previous 
record,  it  may  mean  a  great  deal. 

Take  the  statement  of  condition  on  this  basis.  A  surplus 
may  show  up  this  year  which  is  very  satisfactory  in  itself.  But 
suppose  that  surplus  is  less  than  last  year's?  Will  not  an  im- 
mediate inquiry  be  set  on  foot  to  learn  why  the  surplus  decreased? 
And  will  a  diligent  business  man  cease  his  inquiry  until  he  has 
run  down  the  exact  cause  of  the  decrease?  The  statement  of 
condition  merely  announces  the  result;  it  does  not  tell  why. 
Hence  the  statement  of  operation. 

In  its  simplest  form  the  result  of  operation  is  achieved  by 
deducting  the  cost  of  goods  sold  from  the  total  sales.  These 
figures  are  gross  and  convey  but  little  information.  Therefore 
we  must  analyze;  the  division  and  subdivision  may  be  carried 
on  almost  to  infinity. 

The  limitations  upon  the  elaboration  of  the  process  are  prac- 
tical. It  is  far  better  to  devote  the  attention  to  a  cost  system 
that  will  advise  of  current  doings  rather  than  to  delve  too  deeply 
into  the  past,  however  illuminating  the  information  gained  may 
be — if  it  be  gained  only  by  accountancy.  If,  however,  the 
statement  of  operation  is  compiled  by  an  industrial  engineer  or  a 
cost  accountant  (or  preferably  by  a  combination)  then  not  only 
will  the  diseases  of  the  business  be  diagnosed  as  they  appear, 
but  also  the  remedies  will  be  indicated. 

There  are  two  general  forms  of  statements — elaborated 
according  to  the  purpose  for  which  they  are  to  be  used. 

The  first  is  for  the  banker.  He  is  interested  only  in  results; 
he  does  not  care  much  how  the  profit  was  made  so  long  as  it  was 
made.  The  figures  which  interest  him  are  the  amount  of  business 
done,  the  proportions  for  material  and  for  labor,  the  selling 
expenses,  the  gross  profits,  and  the  dividends  received  or  paid — 
so  that  he  may  compare  the  figures  and  the  percentages  with  the 
records  of  other  concerns  in  similar  lines.    He  is  interested  in 


202  BUSINESS  ACCOUNTANCY 

depreciation  and  wants  it  separately  only  because  he  knows  that 
the  company  which  is  shy  on  profits  will  not  devote  much  atten- 
tion to  depreciation.  He  wants  to  know  the  detailed  sources  of 
income.  For  instance,  a  company  which  had  assets  totaling 
$400,000  showed  a  total  income  of  $40,000;  but,  on  analysis,  it 
appeared  that  $37,500  of  this  sum  was  derived  from  stock  owned 
in  another  company.  The  company  making  the  statement  was 
scarcely  breaking  even  on  its  operations.  It  is  important  to 
know  whether  you  are  investing  in  the  company  before  you,  or 
in  another  company  which  you  do  not  have  the  opportunity  to 
examine. 

The  second  form  of  statement  is  for  the  operator  himself;  he 
is  equally  interested  with  the  banker  in  the  results  achieved; 
but,  in  addition,  he  must  have  the  "hows."  He  asks  for  waste 
percentages,  for  proportions  of .  non-productive  to  productive 
labor  and  the  intimate  details  of  manufacture. 

The  Derivation  of  the  Statement.  The  operating  state- 
ment defined  in  this  chapter  is  made  up  from  the  ordinary  books 
of  record.  After  making  up  the  trial  balance  (Chapter  IX)  we 
distributed  the  figures  between  asset  and  liability  accounts  and 
profit  and  loss  accounts.  Into  the  former  went  the  accounts 
which  represented  those  things  that  remained  in  the  business 
either  as  assets  or  as  liabilities;  into  the  latter  went  the  nominal 
accounts  of  historical  importance.  The  statement  of  operation 
is  founded  on  the  profit  and  loss  accounts.  It  is  in  columnar 
form  in  order  that  the  total  of  the  business  may  be  shown. 
On  it  go  all  the  figures  of  the  trial  balances  which  are  not  used 
in  the  statement  of  condition;  the  two  statements  are  com- 
plementary. The  form  is  a  compromise  one,  because  it  was 
originated  by  accountants  for  the  company  which  had  not  a  cost 
system  and  it  might  be  termed  an  accountant's  cost  sheet  as 
distinguished  from  a  cost  accountant's  sheet. 

Forms  of  Statement.  The  Forms  72  and  73  shown  on  Insert 
X  are  interesting.  The  first  is  the  ordinary  form  for  a  manufac- 
turing enterprise  and  the  second  is  for  a  concern  which  derives  its 
income  from  other  than  trading,  as  a  bank  or  a  professional  man. 

Every  time  that  a  trial  balance  is  taken  off  the  books,  a 
statement  of  operation  should  be  made  out.  A  daily  statement 
would  not  give  sufficient  perspective  to  be  worth  while;  once  a 
month  is  usually  often  enough,  but  in  addition  to  the  regular 
periodical  statements,  others  should  be  compiled  whenever  the 


INSERT  X 

FORMS  72  and  73,  described  on  page  202 


STATEMENT  OF 


INCOME  AND  PROFIT  AND  LOSS  ACCOUNT    (EXCLUSIVE  OF  DEFERRED  AND 

ACCRUED    ITEMS)    FOR  THE  PERIOD  FROM TO ) 

(SEE  ALTERNATIVES  AND  COMMERCIAL  FORM) 


TOTAL  GROSS  SALES 
Deduct: 
(All   allowances  for 
freight, 


forth.) 


NET  SALES 
COST  OF  GOODS  SOLD: 

Inventory  beginning  of  period 

Purchases  during  period 

Productive  labor 

Manufacturing  expenses,  (including 
unproductive  factory  wages. 
Classify  into  insurance,  rent, 
taxes,  repairs  and  renewals, 
power  and  so  forth,  but  exclude 
reserves  for  depreciation.) 

TOTAL  INVENTORY  beginning  of 
periods  and  additions 

Deduct: 

Inventory  end  of  period 

TOTAL  COST  OF  GOODS  SOLD 
MANUFACTURING  PROFIT 
ADMINISTRATIVE  AND  SELLING  EXPENSE: 
(Separate  when  possible.   Selling 
expense  includes  shipping  ma- 
terial and  salaries.) 
Administrative 

(List) 
Selling 
(List! 

and 


NET  PROFIT   FROM  MANUFACTURE 
OTHER    INCOME: 
(Classify  miscellaneous  income, 
such  as  dividends  received  on 


Brought   forward  $ 

OTHER  DEDUCTIONS: 

(Liat  interest  of  every  description 
cash   discount   allowed   customers   and 
bad  debts   to   be   charged  off.) 
TOTAL  OTHER   DEDUCTIONS 
NET   PROFIT    FROM  OPERATIONS 

RESERVES: 

(Classify   reserves   to   provide   for 
impairment    in    the  value  of   as- 
seta.) 
TOTAL  RESERVES 

DIVIDENDS: 

(Deduct  only  those  declared  during 
the  period  based  upon  profits  of 
period.) 

Balance  end  of  period,  trans, 
ferred  to  surplus 

SURPLUS : 

Beginning  of  period 

Add:  Adjustments  applicable  to 

preceding  period 
Deduct;  Adjustments  applicable  to 

preceding  period 
Adjusted  Surplus 

DIVIDENDS: 

(Deduct  those  declared  upon  profit 
of  preceding  period.) 

SURPLUS  END  OF  PERIOD 


NOTE:  The  abov 

manufacturing 
nership,  the 
the  dividends 


If 


e    Is   for   use   in  manufacturin 
sed   for  a   jobbing  business, 
sts  will  be   eliminated.      In 
ision  of  profit   should   repla 


Total    Income 
DEDUCTIONS: 
Interest  paid 

(Cla98ify  when  poaBlble) 

Total    Intereat  Paid 
INCOME  FOR  THE  PERIOD  BEFORE  DE- 
DUCTING   EXPENSES 
EXPENSES  AND  GENERAL  CHARGES: 


Total  Expenaea  and  General 

Charges 
NET   INCOME  FOR  THE  PERIOD 
BALANCE  OF   UNDIVIDED  PROFITS  AT   THE 
BEGINNING  OF  PERIOD 

Add: 

Adjustment  itema  applicable 
to  prevloua  period 
Deduct: 

Adjustment  itema  applicable 


,iou 


rlod 


DIVIDENDS  PAID  DURING   PERIOD 
UNDIVIDED  PROFITS 


r 


OPERATING  STATEMENT!  20$ 

business  seems  to  need  intensive  attention.  An  owner  or  an 
executive  should  constantly  have  his  finger  on  the  pulse  of  the 
business. 

I  shall  take  up  the  items  individually  as  they  appear  on  the 
model  form  shown: 

Gross  Sales.  The  statement  of  operation  begins  at  the 
sales.  The  sales  are  classified  first  as  to  gross,  and  all  forms  of 
direct  sales  of  products  are  included  in  this  classification. 

In  certain  lines  of  business  which,  properly  speaking,  do  not 
have  "sales,"  the  item  is  generally  termed  gross  income  or  gross 
revenue.  Thus  a  contracting  firm  considers  the  income  from 
profits  on  their  contracts.  On  the  other  hand,  a  bank's  is  de- 
rived from  interest  upon  money  loaned  or  commissions  upon 
funds  handled,  and  only  slightly,  as  in  syndicate  and  like  oper- 
ations, from  buying  and  selling. 

In  any  event,  the  statement  begins  with  the  gross  sum 
derived  from  the  particular  operations  in  hand. 

Deductions.  From  the  gross  sales  there  may  be  certain 
deductions  and  allowances.  The  common  deductions  are  allow- 
ances for  returns,  freight  outward,  and  trade  discount. 

Allowances  are  any  remitting  by  the  seller  to  the  buyer  of  a 
portion  of  the  purchase  price;  thus  where  the  goods  are  damaged 
in  transit  or  become  defective  while  in  transit,  or  are  of  bad 
workmanship  in  part  or  in  whole,  or  if,  for  any  reason,  the  ship- 
ment is  not  up  to  standard,  but  is  yet  acceptable  to  the  consignee 
at  a  price,  the  seller  may  make  a  special  allowance  to  the  pur- 
chaser. The  bookkeeping  procedure  is  to  charge  an  account 
called  sales  allowances  and  credit  the  account  of  the  purchaser 
with  the  amount  of  the  allowance.  Naturally  the  allowances 
which  accumulate  throughout  the  course  of  the  year  are  to  be 
deducted  from  the  total  gross  sales. 

Return  sales — Here  the  purchaser  has  actually  returned  the 
goods  as  unsatisfactory  or  as  no  longer  desired.  The  goods 
returned  are  charged  to  an  account  called  "sales  returned"  or 
"sales  returns,"  and  the  account  of  the  purchaser  is  closed  as  the 
opposing  credit. 

Freight  outward  may  be  a  proper  deduction  from  sales  for  the 
reason  that  when  goods  are  sold  f.  o.  b.  at  a  certain  destination 
the  cost  of  that  freight  has  been  included  in  the  selling  price  and 
therefore,  when  such  is  the  case,  the  actual  freight  charges  should 
be  deducted  therefrom. 


204  BUSINESS  ACCOUNTANCY 

But  I  prefer  to  consider  prepaid  freight  as  a  selling  expense 
in  most  cases.  It  is  the  salesman  and  not  the  factory  which 
determines  how  much  freight  is  to  be  paid — for  it  is  the  salesman 
who  finds  the  market.  A  factory  should  not  be  charged  with  an 
expense  over  which  it  has  no  possible  means  of  control.  The 
practice  of  charging  all  freight  outward  into  the  goods  is  mis- 
leading; as  was  pointed  out  in  Chapter  II,  it  often  happens  that 
the  sales  department  goes  too  far  afield  for  its  customers  and  may 
sell  in  districts  where  the  mere  freight  charges  will  absorb  the 
whole  profit. 

It  is  well  to  sell  f.  o.  b.  the  factory  if  the  trade  can  be  brought 
around — as  in  automobiles.  But  trade  customs  are  hard  to 
change,  and  where  it  has  been  the  habit  of  the  manufacturer  to 
pay  freight,  he  cannot  discontinue  the  payments  without  the 
cooperation  of  other  manufacturers  in  the  same  line.  Few 
consumers  will  readily  see  that  it  is  of  advantage  to  pay  only 
their  own  freight  charges  instead  of  also  paying  a  share  of  the 
other  fellow's  through  the  addition  which  is  necessarily  dis- 
tributed over  all  the  goods. 

Trade  discount  is  a  discount  which  is  taken  off  of  the  list 
price.  It  has  previously  been  discussed  (see  page  108).  The 
discounts  classified  as  trade  discounts  are  given  purely  with  the 
idea  of  getting  business  as  distinguished  from  cash  discounts 
which  are  to  encourage  quick  payments.  There  is  no  real  business 
reason  for  an  elaborate  system  of  discount  without  regard  to 
the  buyer,  but  the  adherence  or  non-adherence  to  the  system  is 
a  matter  of  individual  discretion.  Some  of  the  larger  firms 
whose  positions  are  impregnable  have  totally  abolished  trade 
discounts  and  quote  flat  prices,  but  other  equally  large  firms 
adhere  to  the  discount.    There  is  no  rule. 

Although  trade  discounts  appear  on  the  invoices,  only  the 
net  amounts  are  carried  on  the  books.  The  fiction  should  not 
be  persisted  in  at  home. 

After  having  collated  the  items  and  arrived  at  the  total 
amount  of  deductions,  the  total  is  subtracted  from  the  total 
gross  sales;  the  difference  is  the  net  sales. 

Cost  of  Goods  Sold.  The  cost  of  the  goods  which  have 
been  sold  is  computed  from  the  moment  that  the  product  enters 
until  it  is  finished  and  ready  for  shipment.  This  includes  all 
materials  and  supplies  and  all  manufacturing  and  all  necessary 
converting  and  hauling  expenses. 


OPERATING  STATEMENTS  205 

The  best  way  to  arrive  at  this  cost  is  through  a  cost  system. 
If  we  have  the  cost  of  each  kind  or  type  of  article  sold,  it  is  only 
necessary  to  multiply  the  unit  cost  by  the  number  sold,  to  gain 
the  total  cost.  But  failing  a  cost  system,  we  must  work  back- 
ward, as  explained  in  Chapter  IX,  and  by  an  inventory  discover 
what  we  have  in  hand.  Therefore,  in  stating  our  operations, 
we  start  with  the  inventory  of  the  beginning  of  the  period  and 
add  the  various  items  of  productive  labor  and  so  on,  as  shown 
on  the  sheet,  and  from  the  total  we  deduct  the  inventory  of  the 
end  of  the  period  to  find  the  total  cost  of  all  that  has  been  sold. 
Having  no  cost  accounting,  the  whole  process  is  crude,  and  if 
the  inventory  be  inaccurate,  the  resulting  figures  will  all  be 
inaccurate. 

There  are  two  principal  divisions  of  labor,  namely,  productive 
and  non-productive.  Productive  labor  is  that  labor  which  is 
actually  and  directly  put  upon  some  part  of  the  product.  Non- 
productive labor  is  that  which  cannot  be  directly  charged  to 
any  specific  product.  (This  subject  will  have  a  fuller  treatment 
in  the  chapter  on  cost  accounting.) 

Without  a  cost  system,  it  is  difficult  if  not  impossible  to 
apportion  unproductive  or  indirect  factory  labor  (for  it  is  not 
unproductive  in  the  narrow  sense)  and  therefore  the  whole  item 
is  dumped  into  the  most  dangerous  of  all  manufacturing  accounts 
— "manufacturing  expense"  or  "manufacturing  overhead." 

Manufacturing  Expense.  In  addition  to  the  unproductive 
factory  labor  this  inclusive  item  takes  in  many  other  factory 
charges,  a  few  of  which  can,  but  more  of  them  cannot  be  appor- 
tioned without  a  cost  system.  Among  the  items  are  factory 
supplies,  factory  expense,  rent,  insurance,  repairs  and  renewals 
to  plant  and  equipment,  heat  and  light  and  power,  taxes,  and 
depreciation  of  plant  and  equipment. 

Factory  supplies  are  those  small  purchases  which  are  made 
for  the  purpose  of  carrying  on  production  and,  where  their  sum 
is  not  considerable,  are  charged  off  immediately.  Where  the 
supplies  total  a  fair  annual  amount,  an  inventory  of  them  should 
be  maintained  in  the  same  fashion  as  with  the  general  stock. 
As  the  supplies  are  used  on  requisitions,  the  inventory  account 
is  credited  and  the  cost  is  transferred  to  a  factory  expense  account. 
Supplies  are  seldom  so  slight  that  they  can  be  disregarded. 

Factory  expense  represents  these  expenses  which  are  so 
trivial  in  amount  as  to  make  it  ridiculous  to  attempt  an  inven- 


206  BUSINESS  ACCOUNTANCY 

tory.  Where  a  cost  system  rules,  these  small  expenditures  are 
governed  and  directed  by  the  comparisons  in  the  "expense 
analysis."    (See  page  249.) 

Insurance  is  the  amount  of  premium  paid  on  the  factory 
plant  and  equipment  as  well  as  on  the  materials  and  supplies, 
goods  in  process,  and  finished  goods. 

Rent  is  a  debatable  item  when  it  represents  a  charge  for 
occupancy  of  buildings  owned  by  the  operating  company. 
Many  accountants  consider  such  rent  as  an  income  on  capital 
on  one  hand,  and  a  manufacturing  expense  on  the  other.  They 
reason  that  a  man  who  pays  rent  disburses  a  form  of  interest 
for  the  lack  of  enough  capital  to  own  his  own  building.  If  he 
were  to  borrow  money  and  build,  he  would  pay  interest  instead 
of  rent;  that  interest  cost  would  not  be  considered  as  a  manu- 
facturing expense,  but  as  a  capital  charge.  Therefore  they  apply 
the  same  reason,  that  because  of  this  insufficient  capital  he 
must  pay  interest  in  one  form  or  another,  which  in  this  case  is 
termed  rent. 

I  prefer  to  consider  rent  as  a  manufacturing  charge  because 
it  can  thus  most  easily  be  charged.  Certainly  no  one  can  manu- 
facture without  premises  on  which  to  conduct  the  operations; 
if  rent  be  paid,  charge  it  as  such  and  against  manufacturing. 
If,  on  the  contrary,  interest  be  paid,  that  interest  will  later  get 
into  the  cost  when  the  overhead  is  distributed.  The  matter  of 
charging  interest  on  the  investment  is  on  a  somewhat  different 
footing  and  is  taken  up  under  costs  (page  242).  A  safe  rule  in 
accounting  and  one  which  at  the  same  time  is  quite  evident,  is 
to  follow  common  sense  in  making  charges,  put  them  where 
they  obviously  belong,  and  leave  the  discussion  of  economic 
refinements  to  those  who  delight  in  them. 

Taxes  involve  much  the  same  theories  as  rent.  They  are 
urged  as  a  capital  charge  on  the  basis  that  taxes  are  indirect 
charges  by  the  government  upon  the  use  of  wealth.  A  tax  on 
property  is  levied  on  the  assessed  value  of  the  fund  invested. 
Thus  accountants  maintain  that  taxes  should  be  a  capital  or 
income  charge  rather  than  a  cost  of  manufacture.  But  even 
though  the  items  of  rent  and  taxes  may  properly  be  classed  as 
capital  charges,  they  should  be  considered  in  the  cost  of  goods 
sold.  The  capital  is  invested  in  the  plant,  buildings  and  equip- 
ment, and  if  not  invested,  a  rent  is  paid  and  the  charge,  either 
in  the  form  of  rent  or  taxes  is  a  charge  on  the  capital  which  is 
used  to  earn  profits. 


OPERATING  STATEMENTS  207 

Repairs  and  renewals  are  the  sums  expended  in  the  repair  of 
broken  machinery  and  equipment  or  the  substitution  of  new 
parts  to  preserve  the  level  of  efficiency  of  production.  The 
charges  apply  only  to  the  actual  cost  of  repairs  and  replacements 
in  the  course  of  production.  Therefore  they  are  properly  classified 
under  manufacturing  costs. 

Heat,  light,  and  power,  which  are  three  distinct  items  in  the 
cost  of  manufacture,  are  considered  as  one  account,  except  when 
a  cost  system  is  in  force.  We  charge  here  the  power  house  labor, 
the  coal,  oil,  supplies,  and  so  on,  and  consider  all  of  them 
merely  as  materials.  Under  a  cost  system  they  are  distributed 
into  the  goods. 

Depreciation.  It  cannot  be  denied  that  machinery  and 
equipment  lessen  in  value  through  wear  and  tear.  (See  Chapter 
XIII  for  methods  of  depreciation.)  Therefore,  if  materials, 
labor,  and  the  like  are  considered  as  a  manufacturing  ex- 
pense, ought  not  the  amount  of  machine  value  thus  used  also 
be  included?  Or  is  the  charge  against  capital  and  ought  it  not 
go  into  the  goods  eventually  through  the  overhead?  Does  it 
belong  directly  in  the  cost  of  goods  sold? 

The  theory  which  considers  depreciation  as  a  capital  charge 
is  sound.  Whatever  amount  truly  represents  a  waste  or  leakage 
of  capital,  which  is  not  traceable  except  through  the  cost  of 
manufacture,  is  a  capital  charge.  With  a  cost  system  we  can 
take  depreciation  directly  into  account  as  a  manufacturing 
cost,  but  for  the  present  purpose  of  determining  the  actual 
manufacturing  profits,  without  cost  figures,  depreciation  should 
be  considered  only  as  a  capital  charge — as  a  wasting  of  capital. 

Manufacturing  Profit.  Adding  the  inventory  at  the  begin- 
ning of  the  period,  the  purchases,  the  labor,  and  the  manu- 
facturing expense,  we  reach  a  total  from  which  should  be  deducted 
the  inventory  at  the  closing  of  the  period.  The  result  is  the 
cost  of  goods  sold.  This  cost  of  goods  sold  is  in  turn  deducted 
from  the  net  sales  and  the  balance  remaining  is  considered  the 
manufacturing  profit. 

Many  of  the  foregoing  items  would  not  be  involved  in  other 
than  manufacturing,  but  the  general  process  is  applicable  to 
any  business.  The  thought  is  merely  to  find  the  gross  income, 
make  the  deductions  of  the  particular  case  to  find  the  net  income, 
and  from  that  to  deduct  the  cost  of  rendering  the  goods  salable. 
In  a  trading  business,  instead  of  the  many  items  of  labor  and 


208  BUSINESS  ACCOUNTANCY 

manufacturing  expense,  we  should  have  the  large  but  easily 
comprehended  item  of  the  cost  of  the  goods  purchased.  There 
would  be  no  productive  labor  or  any  items  of  actual  fabricating 
expense.  The  big  expense  would  be  the  administrative  and 
selling  expense. 

Administrative  and  Selling  Expense.  Administration 
expense  is  self-evident — the  salaries  of  the  executives,  their 
employees,  and  all  of  that  which  is  expended  on  the  business 
as  a  whole  and  as  distinguished  from  the  selling  end. 

Selling  expense  includes  the  cost  of  shipping  material  and 
the  expenses  of  the  shipping  department.  The  biggest  and  most 
important  items  are  those  of  salaries  of  salesmen  and  their 
selling  and  traveling  expenses.  Then  there  is  advertising  and 
the  thousand  and  one  other  charges  which  it  is  not  necessary 
to  detail  here.  If  the  concern  has  branch  sales  offices,  there 
must  also  be  added  the  salaries  of  managers,  salesmen,  clerks, 
rent,  miscellaneous  sales  room  supplies,  and  all  other  expenses 
pertaining  to  the  branches.  Selling  expense  was  discussed  in  a 
previous  chapter  on  sales. 

The  analysis  of  administrative  and  selling  expense  is  depen- 
dent entirely  upon  the  size  and  conduct  of  the  business. 

The  total  of  these  expenses  is  deducted  from  the  manu- 
facturing profit,  and  the  result  is  a  net  profit  from  manufacture, 
commonly  called  net  income  from  operation.  This  figure  repre- 
sents the  actual  profits  derived  from  the  conduct  of  the  business. 
To  it  should  be  added  any  income  not  arising  as  a  part  of  the 
general  business  operations. 

Other  Income.  The  component  parts  here  may  be  mis- 
cellaneous income,  dividends  received  on  stocks  owned,  interest 
received  on  bonds  or  mortgages  owned,  or  discount  taken  on 
purchases,  and  so  forth. 

Dividends  received  on  stocks  owned  are  those  dividends 
which  come  as  a  return  on  capital  invested  in  some  other  business. 
Likewise  interest  on  bonds  or  other  securities  owned,  such  as 
mortgages,  notes  receivable,  and  the  like. 

Cash  discount  on  purchases  is  a  profit  gained  by  paying 
bills  before  they  fall  due.  It  is  to  be  distinguished  from  trade 
discount,  as  it  is  a  capital  transaction,  while  trade  discounts 
are  allowed  with  the  idea  of  influencing  business  and  are  there- 
fore part  of  the  business  operation.  Had  a  company  insufficient 
capital,  they  could  not  take  advantage  of  the  discounts. 


OPERATING  STATEMENTS  209 

Other  Deductions.  From  the  total  " other  income"  is  to 
be  deducted  such  items  as  cash  discount  allowed  to  customers, 
interest  on  notes  payable  or  mortgages  payable,  and  any  other 
subtractions  of  like  nature.  Cash  discount  on  sales  is  the  reverse 
of  cash  discount  on  purchases;  in  the  one  you  give  and  in  the 
other  you  take. 

Interest  paid  on  notes  payable  or  mortgages  payable  is  a 
proper  income  deduction  because  it  is  a  charge  for  capital  loaned 
to  the  business. 

Losses  on  sales  and  securities  or  even  in  the  sale  of  part  of 
the  company's  assets  is  a  proper  deduction  at  this  point. 

The  income  deductions,  subtracted  from  the  total  income, 
give  a  "net  profit  from  operations."  This  net  profit  distinctly 
differs  from  net  income;  net  income  is  received  from  the  operation 
of  the  business,  whereas  net  profit  represents  the  actual  profits 
derived  from  operation — the  gain  of  the  enterprise. 

Further  deductions  are  reserves,  which  may  be  set  up  against 
losses,  bad  accounts,  or  other  contingencies. 

Dividends  declared,  when  not  immediately  paid,  are  reflected 
in  the  balance  sheet  as  a  liability  and  should  be  a  deduction  on 
the  net  profits  only  when  they  apply  to  the  profits  of  the  period 
under  consideration.  If  the  dividends  are  declared  upon  the 
profits  of  a  preceding  period,  they  should  be  declared  directly 
out  of  the  surplus — they  should  never  be  considered  as  a  part  of 
the  period's  operations,  especially  in  the  sense  of  an  expense. 
I  recall  a  bookkeeper  who,  before  closing  the  books,  always  held 
the  dividends  paid  or  declared  as  an  expense  of  that  particular 
period,  made  a  deduction  therefor,  and  considered  his  final 
balance  as  the  profit  or  loss  for  the  period.  It  is  absurd  to  so 
confuse  profits  and  expenses. 

The  figure  which  results  after  all  the  deductions  have  been 
made  as  above  outlined  is  the  "surplus,"  and  its  amount  must 
agree  with  the  surplus  found  through  the  statement  of  condition 
— for,  to  repeat,  the  statement  of  operation  is  only  the  analysis 
of  the  surplus. 

The  statement  of  operation  is  useful;  the  man  who  forms 
one  is  so  much  the  better  off  for  the  knowledge  that  he  has  gained ; 
but  to  my  mind  a  statement  formed  from  the  books,  such  as  has 
been  described,  fails  in  its  purpose  if  it  does  not  direct  the  business 
man's  attention  to  the  imperative  necessity  of  instituting  some 
opposite  cost  system. 


CHAPTER  XV 

WHAT  A  COST  SYSTEM  MEANS  TO 
YOUR  BUSINESS 

WHAT  are  my  profits?  How  much  do  I  really  make  on 
my  sales?  Did  I  make  or  lose  money  on  that  job? 
Probably  no  man  in  business  would  object  to  having 
his  records  answer  these  questions.  Yet  how  many  records  do 
give  answers?  Will  not  the  average  proprietor  of  a  business 
pursue  relentlessly  the  debtor  who  owes  a  dollar  and  utterly 
ignore  the  dollar  which  passes  out  as  preventable  waste?  Will 
he  not  go  to  any  end  to  have  an  error  in  one  of  his  bills  corrected 
and  yet  bid  upon  a  contract  on  figures  which  are  really  little 
better  than  cost  guesses?  Why  is  it  that  machinery  for  finding 
the  actual  costs  of  doing  business  is  so  rare? 

I  think  that  it  is  because  most  men  in  business  imagine  that 
cost  finding  is  mysterious,  and  cumbersome,  and  involves  so 
much  work  that  it  is  not  worth  while. 

No  business  today  can  be  permanently  successful  without  an 
accurate  cost  system.  It  is  quite  as  essential  to  know  what  has 
gone  into  your  product  as  to  know  what  has  gone  out  to  your 
customers.  You  must  know  whether  or  not  competition  can  be 
or  should  be  met,  whether  you  can  do  business  at  the  other  man's 
prices — he  may  be  selling  so  ruinously  low  that  it  will  be  good 
policy  to  let  him  break  himself  rather  than  try  to  meet  him  and 
break  yourself.  We  have  passed  the  day  of  unintelligent  manu- 
facturing and  merchandising,  and  those  who  do  not  realize  the 
change  will  come  to  their  senses  in  the  bankruptcy  court. 

What  Is  Cost  Accountancy?  Cost  accountancy  is  the 
science  of  discovering  the  exact  cost  of  doing  business — of  all 
that  which  enters  into  a  product,  of  all  that  which  must  be  added 
to  the  purchased  article  to  find  the  point  where  profit  begins. 
Accountancy  proper  is  a  book  record — a  recording- and  correlating 
of  accomplished  facts.  Cost  accountancy  is  a  process  record — 
a  recording  and  correlating  of  the  prices  of  activity. 

210 


COST  SYSTEMS  211 

The  finding  of  the  cost  of  doing  business  is  the  really  im- 
portant portion  of  the  accounting  of  any  enterprise,  for  only 
from  exact  costs  may  future  policies  intelligently  be  planned. 

In  the  preceding  chapter  it  was  seen  that  the  statement  of 
operation  told  something  of  costs.  In  fact,  it  gave  an  exact 
guide  to  total  cost  in  certain  branches  during  the  period  covered 
by  it.  A  man  might  know,  with  a  fair  degree  of  accuracy,  how 
much  it  cost  him  to  do  business  in  the  previous  year,  but  he 
could  not  know  exactly  the  current  costs  of  the  present  year. 

It  is  the  present  year  with  which  we  are  concerned  in  business. 
That  which  is  past  is  useful  only  for  comparison  and  perspective. 
That  which  is  to  come  is  a  matter  for  planning.  You  make 
money  on  what  you  do  today.  The  only  way  to  discover  what 
you  are  doing  today  is  through  a  cost  system. 

Why  Exact  Costs  Are  Needed.  The  proper  cost  system 
is  not  merely  a  revelation  of  profits  from  day  to  day.  Anyone 
who  uses  it  only  to  ascertain  profits,  is  getting  but  a  fraction  of 
the  real  return.  Cost  is  at  the  bottom  of  every  industrial  improve- 
ment. The  revelation  of  cost  is  a  guide  to  better  as  well  as  to 
more  profitable  business — a  guide  to  better  selling  or  to  better 
manufacturing.  The  real  cost  accounting  will  show  where  are 
the  weak  spots  and  therefore  where  betterments  may  be  made. 

Costs  are  not  merely  for  the  manufacturer — as  is  too  often 
supposed.  He  has  his  cost  problems  and  they  are  peculiar — 
in  some  cases  intricate — but  so  also  has  the  retail  dealer  and  the 
professional  man;  in  fact,  every  person  who  engages  in  a  gainful 
occupation  must  know  how  and  why  a  gain  is  had.  Conversely, 
if  the  enterprise  which  was  supposed  to  result  in  a  gain,  unfor- 
tunately results  in  a  loss,  the  loss  must  be  localized  in  order  that 
some  corrective  measures  may  be  employed.  It  cannot  be  local- 
ized unless  by  a  cost  accounting  system  which  shows  up  in  detail 
the  weakness  and  the  strength. 

Cost  figures  in  any  single  year  are  of  only  partial  value. 
They  show  what  is  happening;  but,  in  order  to  be  most  useful, 
these  figures  should  be  brought  into  comparison  with  those  of 
other  periods.  In  costs,  as  with  practically  every  other  business 
operation,  it  is  the  relations  which  teach  and  not  the  isolated 
accounts.    The  cost  system  need  not  be  elaborate. 

Good  Systems  Are  Not  Complicated.  The  idea  is  cur- 
rent that  the  obtaining  of  cost  is  a  difficult  and  hazardous 
affair  with  the  result  at  the  best  a  gamble.    There  is  the  classical 


212  BUSINESS.  ACCOUNTANCY 

instance  of  the  company  which  installed,  at  enormous  outlay 
and  under  most  expert  guidance,  a  plan  by  which  every  item  of 
expense  was  recorded  and  distributed.  This  company  had  been 
prosperous.  It  began  to  decline;  finally  it  reached  the  point 
where  the  stockholders  demanded  executive  changes.  The 
new  officers,  as  a  first  step,  threw  out  the  elaborate  series  of 
reports  and  tabulations  together  with  the  40  or  more  clerks 
who  had  been  compiling  them;  they  brought  in  a  simplified 
system  adapted  to  the  needs  of  the  company.  Then  it  was 
discovered  that  the  company  had  been  making  money  from 
manufacture,  but  the  cost  system  had  been  so  ill-conceived  and 
so  complex  that  profits  had  been  absorbed  in  their  recording. 
This  illustration  gives  an  excellent  type  of  everything  that  a 
cost  system  should  not  be  and  it  conveys  a  warning  of  the  dangers 
which  may  be  encountered.  A  system  is  not  to  be  judged  by 
its  elaboration.  Any  system  is  good  which  gives  the  essential 
facts  with  a  minimum  of  labor,  and  conversely,  any  system  is 
bad  which  gives  the  facts  with  an  undue  amount  of  labor. 

No  One  System.  I  have  spoken  of  a  cost  system.  There 
is  no  "system."  There  are  no  two  factories,  there  are  no  two  stores, 
in  which  exactly  the  same  cost  methods  can  profitably  be  used. 
A  system  is  more  or  less  like  a  garment.  You  may  buy  it  ready 
made  and  possibly  with  some  alterations  it  may  fit  you  if  you 
have  a  moderately  standard  figure;  but  if  you  have  a  peculiar 
figure,  no  amount  of  pulling  and  cutting  will  produce  a  suit 
that  will  convey  the  impression  that  the  maker  had  even  heard 
of  you,  much  less  measured  you. 

Further,  the  cost  garment  must  not  only  fit  the  figure  of  the 
wearer,  but  it  must  suit  his  coloring  and  (insofar  as  his  tastes 
are  reasonable)  his  tastes.  To  this  extent  I  agree  with  the 
familiar  plaint:  "Yes,  that  is  a  good  scheme,  but  it  would  not 
do  in  my  business;  my  business  is  peculiar." 

Each  business  has  its  individual  characteristics;  there  may  be 
greater  differences  between  two  factories  producing  men's 
hosiery  than  between  one  which  makes  pins  and  another  which 
constructs  battleships. 

From  that  which  I  have  said  it  might  be  taken  that  I  am 
bent  on  discouraging  the  adoption  of  cost  systems.  I  am  intent 
on  discouraging  the  installation  of  any  cost  system  which  is 
not  suitable  to  the  business ,  for  I  know  absolutely  that  disorder 
will  follow.     This  statement  is  based  on  extended  experience. 


COST  SYSTEMS  213 

But  if  costing  procedure  must  be  adjusted  with  such  delicacy, 
is  it  worth  while  to  venture  the  operation?  And  can  methods 
be  found  which  will  fit  "my  business"? 

The  Right  System  Can  Be  Had.  Every  concern,  however 
extraordinary  its  dealings,  can  and  should  have  a  method  of 
accurately  finding  costs.  There  is  always  some  way  of  finding 
exact,  or  practically  exact  costs,  and  that  way  need  not  be  unduly 
expensive  or  bothersome.  Perhaps  slight  changes  will  be 
necessary  in  the  conduct  of  affairs,  but  these  will  be  changes 
for  the  better  and  which  should  have  been  made  in  any  event. 
The  expense  will  never  be  material  unless  the  method  adopted 
is  too  elaborate  and  seeks  to  trail  every  fraction  of  a  penny 
to  its  lair. 

In  a  small  business  the  work  of  cost  accounting  can  easily 
be  added  to  the  duties  of  the  present  office  force,  although  it 
would  be  better  to  rearrange  their  work  so  that  one  clerk  ex- 
clusively handles  the  cost;  a  business  must  be  very  large  indeed 
to  require  the  services  of  more  than  a  couple  of  clerks  in  the 
cost  department.  And  if  the  volume  is  so  great  as  to  entail  a 
considerable  increase  in  the  clerical  force,  then  the  savings  will 
be  correspondingly  great. 

Once  an  executive  decides  to  adopt  cost  finding,  he  should 
proceed  cautiously  both  in  the  selection  of  the  system  and  in 
its  installation.  And  on  these  important  points  no  exact  and 
scientific  rule  can  be  given.  The  very  nature  of  the  subject 
matter  precludes  rules;  the  guide  must  be  common  sense.  As 
was  said  of  accountancy  proper,  an  unwelcome  or  misunderstood 
change  in  methods  cannot  be  successful;  the  man  who  " installs" 
a  new  system,  complete  and  far-reaching,  will  shortly  join 
those  who  think  that  cost  finding  is  impossible.  The  human 
factor  must  be  ever  in  mind  in  business  changes,  unless  the 
breaking  up  of  the  organization  is  of  no  moment. 

If  the  system  gives  the  true  results,  it  is  right;  if  it  gives 
untrue  results,  it  is  wrong.  The  whole  matter  is  empirical;  one 
must  select  the  elements  which  seem  to  suit  the  case.  If  they 
do  not  suit,  then  a  change  should  be  made  and  after  that  another 
change — until  something  which  does  the  work  well  is  obtained. 
When  that  which  seems  right  has  been  found,  it  should  be  care- 
fully watched  to  see  that  it  stays  right. 

"  Costs  As  an  Aid  to  Business.     Cost  accounting,   as  all 
accounting,  is  to  be  considered  as  an  aid  to  better  business  and 


214  BUSINESS  ACCOUNTANCY 

not  as  a  business  in  itself.  Accurate  tabulated  costs  will  point 
the  way  to  improvement,  but  they  will  not  make  the  improve- 
ment. They  are  not  an  end — merely  a  means  to  an  end.  This 
seems  ridiculously  trite,  but  I  have  found  no  end  of  companies 
which,  after  the  installation  of  first-class  and  expensive  systems, 
have  sat  back  and  expected  the  inanimate  records  to  undertake 
the  executive  control.  Possibly  cost  accountants  have  had  a 
little  to  do  with  this  idea  because,  in  the  first  enthusiasm,  not 
a  few  of  them  were  so  carried  away  by  the  scientific  possibil- 
ities that  they  quite  forgot  all  about  the  human  factor. 

You  cannot  make  money  out  of  any  cost  system  ever  devised ; 
but  a  cost  system  will  show  you  how  to  make  money.  It  will 
point  out  to  you,  if  you  look  at  it  intelligently,  where  you  can 
make  improvements,  and  it  is  then  clearly  up  to  you  to  look 
about  to  find  what  are  the  most  approved  methods  which  may 
be  utilized.  If  one  does  not  know  what  he  is  doing,  he  will 
not  be  much  interested  in  what  others  are  doing  better  than  he. 

Choosing  the  Right  System.  In  the  space  which  is  here 
at  command  it  will  not  be  feasible  to  go  further  than  the  elements 
of  cost  accounting,  with  such  examples  from  experience  as 
seem  to  illustrate  the  specific  application  of  these  elements. 
From  them  it  should  be  possible  to  adapt  such  features  as  will 
apply  in  any  special  case. 

Do  not  take  any  method  in  entirety.  The  manufacturer 
may  have  problems  which  will  be  helped  out  by  a  study  of  retail 
methods,  the  man  selling  services  may  learn  from  both.  And 
again  it  may  be  desirable  to  have  more  than  one  method  in  a 
single  establishment — different  departments  may  require  differ- 
ent methods.  The  man  who  takes  but  one  system,  half  masters 
it,  and  then  tries  to  adjust  his  business  to  it,  will  fail.  He  should 
know  as  much  as  possible  about  various  installations  and  from 
them  he  can  find  ways  to  simplify  or  to  make  more  accurate 
his  own  adaptations. 

The  first  requisite  in  cost  finding  is  to  know  what  you  have 
on  hand  and  then  to  keep  track  of  each  article  or  commodity 
as  it  leaves  your  place,  or  as  it  travels  from  department  to 
department.  Governing  the  capital  accounts,  stockkeeping, 
and  stocktaking,  have  all  been  given  in  detail  in  the  foregoing 
chapters.  The  practices  there  explained  and  the  forms  shown 
were  all  designed  to  make  part  of  a  cost  system.  It  will  therefore 
be  assumed  that  the  reader  is  familiar  with  the  registers  of 


COST  SYSTEMS  2l5 

plant  and  equipment  and  the  inventory  records  and  requisition 
forms.  Floor  plans  showing  all  the  details  of  your  establishment 
should  also  be  in  hand;  on  them  the  machinery,  fixtures,  or 
selling  departments  should  be  located  with  numerals  or  symbols 
to  indicate  each  piece  or  section. 

Fundamentals  of  Cost.  Your  business  is  divided  into  at 
least  two  of  three  general  divisions — materials,  labor,  and 
expense.  In  some  lines  of  manufacturing  the  material  item  is 
very  small,  while  the  labor  and  expense  are  very  great.  In 
merchandising,  usually  the  material  makes  up  the  highest  cost 
item,  while  the  labor,  as  compared  with  the  volume  of  business, 
is  comparatively  small.  A  professional  company  has  only 
labor  and  expense.  But  no  matter  what  the  combinations, 
two  of  the  three  elements  are  present.  It  is  the  purpose  of  cost 
accounting  to  show  accurately  the  proportions  of  these  elements 
in  the  price  of  that  which  is  sold — whether  that  which  is  sold 
is  a  commodity  or  a  service. 

Material.  "Material"  in  cost  accountancy  is  that  which 
actually  goes  into  a  product  and  which  can  be  traced  to,  or  seen 
in  the  ultimate  finished  article.  Take  a  desk.  The  materials 
are  wood,  veneer,  hardware,  stain,  and  so  forth.  Other  materials 
have  been  used  in  the  production,  such  as  sandpaper  and  oil, 
but  these  cannot  be  traced  directly;  they  are  classed  as  "supplies  " 
and  included  in  the  "manufacturing  expense."  The  same 
principles  apply  in  the  merchandising  of  finished  products, 
although  the  peculiar  points  there  arising  will  be  taken  up  in  a 
separate  chapter. 

Labor.  "Labor,"  like  "material,"  has  its  own  divisions — 
(1)  that  which  is  direct  and  "productive"  and  (2)  that  which  is 
indirect  and  often  misnamed  "non-productive."  The  man 
who  cuts  the  wood  for  the  desk,  the  planer,  the  cabinet  maker, 
the  rubber-down,  the  varnisher,  perform  services  which  may 
accurately  be  charged  to  an  article;  but  it  is  not  possible  so  to 
charge  the  time  of  the  receiving  clerk,  or  of  the  general  foreman 
or  superintendent,  although  it  is  often  possible  to  charge  the  time 
of  a  "working"  foreman.  Therefore  the  items  of  labor  which 
cannot  go  against  a  particular  article,  shift  over  into  "manu- 
facturing expense." 

The  charging  of  materials  and  labor  to  specific  articles 
affords  no  great  difficulty  in  most  cases,  for  most  of  the  items 


216  BUSINESS  ACCOUNTANCY 

are  plainly  traceable.  It  is  with  "manufacturing  expense,"  the 
expense  of  doing  business — the  "overhead" — that  the  trouble 
comes,  and  here  it  is  that  the  cost  system  makes  good  or  falls 
down.  The  expense  is  not  only  hard  to  apportion,  but  it  is  often 
the  big  cost;  it  will  run  from  a  fraction  of  the  cost  of  the  material 
and  labor  to  many  times  their  value. 

Expense.  The  indirect  expenses,  "overhead"  or  "burden," 
are  all  of  the  expenses  other  than  those  included  in  direct  labor 
and  material.  Among  them  are  the  capital  charges,  depreciation, 
rent,  heat,  light,  power,  administration,  selling,  advertising — 
in  short  all  of  those  charges  which  contribute  either  to  the 
manufacture  or  to  the  sale  of  an  article,  but  which  cannot  be 
pointed  out  in  the  finished  article  itself. 

Apportioning  the  Expense.  It  is  not  difficult  to  discover 
these  charges,  but  it  is  difficult  properly  to  apportion  them. 

Why  not  take  the  total  of  all  such  charges,  divide  it  by  the 
number  of  articles  produced  or  sold,  and  thus  gain  the  overhead 
per  article? 

The  result  would  not  be  the  actual  overhead  per  article,  for 
each  article  does  not  absorb  the  same  amount  of  charge.  The 
figures  would  only  be  misleading;  some  articles  would  be  over- 
loaded and  others  have  less  than  a  full  share.  Hence  some  goods 
would  be  sold  too  cheaply  and  others  at  too  high  a  price. 

The  same  objection  blocks  any  division  of  overhead  on  the 
basis  of  the  cost  of  material;  a  gold  ring  does  not  take  manu- 
facturing expense  against  a  silver  ring  in  the  ratio  of  the  value  of 
gold  to  silver. 

There  are  no  rough  and  ready  distributions  of  expense.  It 
is  not  possible  here  even  to  indicate  them  without  trespassing 
on  the  later  parts  of  this  volume  given  to  that  particular  subject. 

Cost  is  not  at  all  an  accountancy  matter.  The  statement  of 
operation  described  in  the  preceding  chapter  will  give  you  the 
total  cost  of  operating  for  the  preceding  year.  It  has  been  the 
practice  of  many  merchants  and  manufacturers  to  take  their 
expense  burden  of  the  previous  year  as  a  basis  for  their  operations 
in  the  succeeding  year.  That  is  the  only  figure  which  they  can 
take  if  they  rely  upon  accountancy  proper  for  their  results. 

Costs  from  the  Statement  of  Operation.  What  it  cost  to 
do  business  last  year  is  not  a  guaranty  of  cost  for  this  year. 
Such  an  assumption  courts  disaster. 


COST  SYSTEMS  217 

Again,  manufacturing  expense,  which  is  calculated  from  the 
statement  of  operation,  is  not  in  such  specific  detail  as  to  form  a 
basis  for  accurate  departmental  analysis.  It  must  be  remembered 
that  ascertaining  profits  is  only  one  part  of  a  cost  system.  The 
even  more  important  side  is  the  bettering  of  manufacturing 
and  selling  methods.  Business  is  built  up  by  selling  a  better 
article  than  a  competitor.  The  article  may  be  higher  in  price 
but  so  much  better  in  quality  that  it  is  ultimately  cheaper;  or  it 
may  be  of  the  same  quality  as  a  competitor's  but  lower  in  price. 
If  the  price  be  lowered  merely  to  get  business,  bankruptcy  may 
be  ahead,  but  if  it  be  lowered  on  an  intelligent  and  discrimin- 
ating basis  of  costs,  then  sound  business  is  furthered. 

Using  Cost  Figures.  The  average  manufacturer  seldom 
hesitates  to  cut  his  prices  to  suit  those  of  a  competitor.  Without 
a  cost  system  he  does  not  know  that  the  other  man  may  be 
selling  below  cost  or  that  he  may  have  some  peculiar  local 
advantage  which  gives  him  a  profit  where  others  would  have 
a  loss.  The  manufacturer  who  (without  knowing  costs)  imagines 
that  he  can  make  anything  as  cheaply  as  any  competitor  is 
likely  to  be  brought  to  a  different  notion  by  his  creditors. 

If  you  have  an  accurate  cost  system  and  a  red  balance  appears 
denoting  a  loss  on  certain  lines,  drastic  executive  action  is  im- 
perative and  it  may  take  any  one  of  three  directions:  (1) 
manufacturing  more  efficiently,  or  (2)  if  such  is  impossible, 
increasing  the  price  of  the  article,  or  (3)  stopping  the  man- 
facture  of  the  article  entirely,  or  taking  orders  for  it  only  in  con- 
junction with  more  profitable  merchandise. 

Take  the  following  two  instances  of  how  cost  accountancy 
makes  for  profits — they  are  only  two  from  many  thousands. 

After  a  few  months'  study  of  his  problem,  we  were  compelled 
to  tell  a  large  eastern  manufacturer  that  unless  better  prices 
were  had,  only  a  slight  margin  of  profit  could  be  secured  on  a 
group  of  articles,  representing  60%  of  his  total  business. 

To  convince  him  of  the  correctness  of  the  contention,  we 
analyzed,  in  the  minutest  detail,  every  element  of  cost,  showed 
him  where  improvements  could  be  made,  and  how  much  such 
improvements  would  reduce  the  cost  of  manufacture. 

In  our  analysis,  we  were  able  to  show  seven  items  that  yielded 
excellent  margins  of  profit.  Four  of  these  had  never  been  pushed 
because  preference  had  always  been  given  to  the  leaders — which 
were  unprofitable. 


218  BUSINESS  ACCOUNTANCY 

That  was  four  years  ago.  Last  June  an  audit  showed  that 
the  profitable  lines  had  more  than  supplanted  in  volume  the 
unprofitable  ones,  and  as  a  result  the  per  cent  of  net  profit  was 
exactly  four  times  as  great  as  in  1911,  though  the  volume  of 
business  differed  slightly. 

Then  there  is  the  case  of  B  whose  sales  manager  insisted 
that  the  factory  make  everything  for  which  orders  could  be 
secured;  the  catalog  resembled  that  of  a  mail-order  house. 

After  accurate  costs  had  been  procured,  we  convinced  the 
general  manager  and  the  sales  manager  that  much  of  the  business 
was  unprofitable.  We  showed  that  the  setting-up  time  of  small 
lots  in  the  press  room,  which  had  previously  been  absorbed  in  a 
non-productive  labor  charge,  often  amounted  to  three  times  the 
actual  operation  performance  time. 

We  also  showed  that,  consequently,  the  inactivity  of  their 
expensive  presses  was  very  high  because  they  remained  idle 
while  the  dies  were  being  set,  and  that,  as  a  result,  the  cost 
per  active  hour  was  astounding. 

We  analyzed  their  tool  investment  for  numerous  items  and 
showed  that  the  sales  per  dollar  of  fixed  investment  were  small; 
that  small  lot  manufacturing  demanded  excessive  clerical  and 
non-productive  help,  and  that  many  other  manufacturing 
difficulties  resulted. 

Shortly  thereafter  every  item  in  the  fine  was  analyzed  from 
the  viewpoints  of  past  performance  and  future  possibilities. 
The  line  was  reduced;  350  articles  were  omitted.  In  addition, 
after  many  items  a  notation  appeared  to  the  effect  that  the  price 
was  dependent  on  the  size  of  the  order  and  that  no  order  would 
be  accepted  below  fixed  minimum  quantities. 

That  company  is  now  making  more  money  than  ever  in  its 
previous  history. 

A  increased  his  profits  by  gradually  withdrawing  from 
a  line  limited  in  its  earning  ability,  while  B's  success  came  when 
he  ceased  doing  a  specialty  business  on  lines  that  were  not 
selling  at  specialty  prices. 

I  have  been  speaking  of  cost  accountancy  only  in  general 
terms.  In  the  following  chapters  will  be  taken  up  costs  as 
related  to  manufacturing  and  selling,  costs  in  the  sale  of  services 
and  costs  in  merchandising.  Then  we  shall  show  how  the  ordi- 
nary books  of  account  are  used  to  check  up  the  results  obtained 
by  the  system — to  indicate  how  all  of  the  divisions  of  a  business 
which,  is  properly  accounted  dovetail  together. 


CHAPTER  XVI 

KEEPING  A  RECORD  OF  THE  COST 
OF  MATERIALS 

THE  charging  of  materials  is,  in  general,  the  easiest  portion 
of  cost  accounting  and  one  where  few  can  go  wrong.  The 
terms  denoting  the  two  divisions  into  which  materials  are 
divided  for  accounting  purposes  are  (1)  materials  and  (2)  sup- 
plies. The  materials  are  that  which  can  be  seen  in  the  finished 
article  or  which  can  be  traced  definitely  into  it,  while  the  sup- 
plies correspond  to  the  indirect  labor — they  are  in  the  article 
but  not  in  a  precisely  measurable  degree.  Therefore,"  supplies" 
charge  into  the  department  overhead. 

In  the  chapter  on  purchasing  (Chapter  V)  the  fashions  of 
stockkeeping  and  requisitions  were  described.  Some  such  sys- 
tems are  essential  in  cost  accounting. 

The  materials  are  charged  directly  from  their  requisition  sheets 
to  the  cost  sheet  of  the  article  or  group  which  is  going  through 
the  factory.  The  supplies  requisitions  follow  the  same  course, 
but  they  are  charged  into  the  department  overhead  and  reach 
the  cost  sheet  in  the  distribution  of  that  overhead. 

It  is  of  the  utmost  importance  that  materials  and  supplies 
be  kept  in  separate  records  and  it  is  equally  important  that  the 
supplies  be  closely  checked,  for  they  are  vague  factors  in  which 
much  waste  may  occur.  A  constant  endeavor  should  be  made 
to  bring  the  supplies  around  to  a  material  charge  and  some  of 
the  methods  will  be  given  later  in  this  chapter. 

When  a  job  is  undertaken,  a  cost  sheet  is  made  out  with  the 
name  of  the  article  to  be  constructed  or  of  the  lot,  if  the  work 
goes  through  in  lots.  These  cost  sheets  collect  the  entire  costs 
of  the  job  as  it  progresses  and  the  further  entries  of  labor  and 
expense  are  discussed  in  the  chapters  immediately  following. 
Here  we  are  concerned  only  with  the  charge  for  materials  and 
supplies.  The  cost  sheets  are  kept  in  the  office  and  ordinarily 
do  not  follow  the  work  through  the  shops.    They  may  be  sup- 

219 


220  BUSINESS  ACCOUNTANCY 

ported  by  subsidiary  records  but,  insofar  as  the  material  is 
concerned,  I  think  that  all  large  entries  may  be  accurately  taken 
from  the  requisitions  and  data  of  the  purchasing  department. 
The  entries  are  made  at  the  inventory  values. 

The  shop  gets  certain  material  on  requisition  from  the  stock 
room.  The  requisition  contains  the  job  number  and  it  passes 
from  the  stockkeeper  to  the  cost  department  where  the  items  are 
entered  against  the  job. 

This  is  the  easiest  method  of  keeping  track  of  material  and 
no  more  involved  method  produces  any  better  results. 

Forms  of  Cost  Sheets.  Form  74  is  designed  for  an  arti- 
cle which  goes  through  a  number  of  departments  in  the  course 
of  fabrication,  with  various  manufacturing  expense  and  other 
charges  in  each  department. 

Form  75,  in  addition  to  the  above,  has  spaces  which  show  the 
hours  so  that  the  manufacturing  expense  may  be  distributed  on 
the  productive  hour  basis. 

Form  76  is  designed  for  a  textile  factory  in  which  the  product 
undergoes  a  considerable  amount  of  shrinkage.  Here  the  weight 
of  the  raw  material  is  ascertained  at  the  beginning  and  the  lot 
is  weighed  at  the  end  of  each  process  to  find  the  waste  from 
shrinkage.  The  form  is  adaptable  to  any  manufacturing  in 
which  the  waste  credits  are  important. 

Form  77  is  for  a  press  work  shop,  such  as  a  boiler  shop  or 
a  concern  making  automobile  springs,  or  for  any  concern  where 
the  steps  in  fabrication  are  definite. 

Form  78  is  for  an  article  in  which  the  labor  operations  are 
simple  and  which  does  not  go  into  any  considerable  number  of 
departments.  The  form  shown  has  been  used  for  some  years  in 
a  glove  factory. 

It  is  always  possible,  but  not  always  practical  to  trace  every 
element  of  a  product  through  the  material.  The  cost  of  finding 
the  amount  of  material  used  may  run  into  figures  comparable 
with  the  worth  of  the  material  itself.  Therefore  use  common 
sense;  do  not  run  down  each  item  as  such — although  the  capa- 
bility of  making  an  intense  pursuit  should  be  present  to  be  used 
when  exact  costs  are  needed  as  standards. 

The  proper  course  is  to  charge  the  amount  of  material  accord- 
ing to  the  specifications — we  know  what  should  go  into  the  job 
— and  then  keep  tally  on  the  waste.  This  is  possibly  a  negative 
method,  but  it  is  practical  and  accurate  in  many  cases. 


KEEPING  TRACK  OF  MATERIALS 


221 


Take  the  construction  of  a  boiler.  It  would  be  both  expen- 
sive and  useless  to  weigh  the  big  boiler  sheets.  One  knows  how 
much  metal  should  go  into  a  boiler.  The  sheets  are  of  a  certain 
thickness  and  more  than  the  standard  number  cannot  be  used. 
The  sole  point  is  to  figure  the  waste.  We  know  the  price  of 
the  sheets;  we  know  the  waste;  the  result  is  the  material  cost. 

But  a  caution  must  be  given  against  accepting  the  standard 
weights  as  always  the  actual  weights.  Not  infrequently  the 
costs  of  individual  articles  are  figured  on  the  basis  of  the  stand- 
ard weights  and  the  differences  between  these  weights  and  the 
actual  are  neglected.    Take  this  case  from  an  iron  foundry: 

Total  metal  cost $10,500 

Total  pounds  of  good  castings  made — actual 1,500,000 

Metal  cost  per  100  pounds  good  castings — actual $0.70 

Total  pounds  good  castings  made — standard 1,425,000 

Overweight 75,000 

Value  not  accounted  for  in  costs  (75,000  lbs.  at  $0.70) $525 


FINAL  COST 

Machine  or  Part 

Description 

Symbol 

Materials 

Labor 

Dept. 

DepL 

Dept. 

Dept. 

Dept. 

Dept. 

! 

Assembling 

l 

— : 

Total   Materials 

Total    Productive  Labor 

%  Added  for  Expense 

Amount  of  This  Expense 

Summary 

Total  Materials 

Total  Labor  and  Expense 

Dept. 

n«pt 

DepL 
Dept. 

Dept. 

Dept. 
Total  Expense 

Labor 

Expense 

Total  Labor 

$ 

Total  Factory  Cost 
Snlrl  At                                                  s 
%    Selling  Exponso                           S 
Net  Selling  Price 

Form  74  I 

222 


BUSINESS  ACCOUNTANCY 


The  cost  per  100  pounds  of  good  castings  is  figured  from  the 
actual  weight,  while  the  cost  of  an  individual  article  is  computed 
from  the  standard  weight.  This  results  in  the  exclusion  of  the 
value  of  the  overweights  from  the  costs.  The  above  considers 
only  the  material  value,  but  there  is  generally  a  similar  omis- 
sion in  computing  the  melting  cost  and  other  operations  that 
are  figured  on  a  weight  basis,  such  as  cleaning  and  grinding. 


FINAL  COST 

Stylo  tin.                       (aim!  Such  Other  Descrintinn  As  You  Oe sire  1 

Material,  or  Operation 
and  Description 

Material 
Values 

Productive  Labor 

Dept. 

Dept. 

nept. 

Dept 

nept 

Dent. 

Dept. 

Hrs. 

ArrrL 

Hrs. 

Amt 

Hrs. 

Amt 

Hrs. 

Amt 

Hrs 

Amt. 

Hrs. 

Amt. 

Hrs. 

Amt. 

L. 

1__— — - 1 

Total  Materials 

Total  Productive  Labor 

%  Added  for  Expense 

Amount  of  That  Expense 

OUIYIIYIMn  I 

Total  Materials 

.abor  and  Expense 

$ 
* 

nnpt. 
nept. 

Dept. 

nept. 

n«pt. 

Dept. 

n«pt 

Labor 

Expense 

Total  Labor 
Total  Expense 

Total  Factory  Cost                                                                        $ 

Sold  at                                                            $ 
%  Selling  Expense                                       S 
_%  Discount                                                 $ 
Net  Selling  Price                                                                              $ 

Form  75 1           Net  Profit  or  Loss                                                                         $                      —  ' 

Handling  Losses  or  Wastes.  Another  example  of  the  same 
kind  of  error  is  the  neglect  of  material  and  processing  cost  on 
articles  that  are  spoiled,  lost,  or  that  otherwise  disappear  in 
process.  For  instance,  enough  material  may  be  issued  to  pro- 
duce 100  of  a  given  article.  The  earlier  operations  may  be  per- 
formed and  the  100  remain  intact  up  to  some  point  where  a 
number  are  spoiled.  In  very  many  cases  costs  will  be  figured 
just  as  though  the  original  100  were  completed  and  were  avail- 
able for  sale.    For  instance: 


KEEPING  TRACK  OF  MATERIALS 


223 


Value  of  material  originally  issued  for  100  pieces  (10  cents  per  piece) $10.00 

Labor  and  expense  cost  of  100  pieces  up  to  the  point  where  5  pieces  are 

spoiled  (15  cents  per  piece) 15.00 

Total  cost  up  to  point  of  spoilage $25.00 

Additional  labor  and  expense  for  completing  95  pieces  (2  cents  per  piece)      1.90 

Total  gross  cost  of  95  completed $26.90 

Less  scrap  value  of  5  pieces  spoiled  (2  cents  per  piece) .10 

Additional  labor  and  expense  for  completing  95  pieces  (2  cents  per  piece) .  $  1.90 

Total  net  cost  of  95  pieces 26.80 

Net  cost  per  piece '. 28.2  cents 


DESCRIPTION 

lA/nRSTPn   YARN   MST 

DATE 

SHRINKAGE 

LOT  NO.  8 

PRICE  PER  LB. 
FINISHED 

MATERIAL 

WASTE 

LABOR  AND  EXPENSE 

Pounds 

Price 

Amount 

Kind 

% 

Pounds 

Price 

Amount 

Operation 

Pounds 

Price 

Amount 

Clean  Wool 

3/^U 

tos*> 

Ji/7,/18.  it 

Burr 

A.** 

to.io 

%  4.S.  10 

Carding 

At  fill 

Sj.oin 

4  ^m 

Card 

1,1  1  J 

oit 

to.  It 

Sweeps 

/,<3/5 

10 

I3-I-  50 

jjr./» 

Gilllng 

A?.  Oil 

ooH 

a35./j 

Noils 

M0 

*>,<na. 

.Ji 

l.ilfl.Tt 

Combing 

AT,  Oil 

0101 

a.73  no 

TOTALS 

n,m.si 

if  it  Di 

<n?V 

Waste  Credits 

l,Sli.iH 

Net  Stock  Cost 

u-4 

)S,100^.S 

Unit  Cost 

03Z 

wii 

Costs  of  Tops 

US,  011 

.UO- 

Ib,st11k 

Laps 

1.01 

Ail 

JSJL 

1  il »s 

Drawing 

&>1,lab 

ILIA 

fc  72 .55 

Sweeps 

1 

At 

.10 

A.10 

Laps 

.% 

m 

.!■&. 

fcvffc 

Speeder 

A%le0i 

.  01  ft 

iA1.it 

Laps 

\A 

%V-t 

.54 

/  It.  t% 

Spinning 

A^Oil 

01AO 

1  001.  ho 

H-Ends 

■  A 

V? 

.  iS 

nif 

31's 

Fly  and  Swp. 

■  1 

Ill 

■  10 

if  3.0 

H-Ends 

.1 

3.1b 

iS 

If.loO 

Twisting 

A\ltA, 

.oAri 

k  ii.  r/ 

Sweeps 

.  r 

IA0 

.10 

li   0  0 

2-31 '8 

H-Ends 

r 

1  If 

.■J5 

TV.6S 

Spooling 

AW 

0/71 

•iiA.ll 

TOTALS 

lt,S(,1.1(, 

S-Hti& 

\tHSAl 

Waste  Credits 

sn-rA. 

Net  Stock  Cost 

.<.*]< 

lt.,16.1  3.H 

Unit  Costs 

M* 

V*"  11 

Total  Yarn  Cost 

ai,5  8> 

.8  0S 

l%cbb1i 

Form  76 



Very  frequently  the  cost  of  such  an  article  is  actually  com- 
puted by  adding  together  the  three  figures  for  material  and 
manufacturing  costs  per  piece  (10  cents,  15  cents,  and  2  cents) 
to  give  a  total  cost  of  27  cents.  This  results  in  a  figure  more 
than  4%  less  than  the  actual  cost. 

Or  take  it  from  a  different  field.  The  higher  grades  of  cer- 
tain fruits,  such  as  olives,  are  packed  in  fancy  bottles.  These 
elaborate  bottles  are  more  fragile  than  the  ordinary  bottles  and 
quite  a  number  of  them  break  while  being  filled.  The  bottle  is, 
of  course,  quite  as  much  a  part  of  the  finished  product  as  is  the 
olive  itself,  because  they  are  sold  together.  It  would  be  unfair 
to  charge  the  bottle  breakage  over  everything  which  the  factory 


224 


BUSINESS  ACCOUNTANCY 


produced.  The  procedure  is  to  charge  broken  bottles  as  waste 
against  good  bottles  and  thus  arrive  at  the  actual  cost.  This 
cost  is  somewhat  higher  than  the  original  cost  price. 

The  setting  of  standards  and  the  giving  of  a  bonus  which 
increases  as  the  waste  decreases  will  work  wonders  for  exact 
costs  and  also  may  often  be  used  to  take  that  which  could  other- 
wise be  classed  only  as  "supplies"  into  the  category  of  directly 
chargeable  material. 

A  "standard"  is  arrived  at  by  discovering  exactly  how  much 
material  should  be  used  and  then  allowing  a  percentage  for 
absolutely   unavoidable   waste.    The    resulting    figure    is    the 


Finished  Weigh! 

FINAL  COST 

Model 

\ 

Selling  Price 

For 

Description 

Order  No. 

Order  No. 

Order  No. 

Labor 

Expense 

Labor 

Ex 

MM 

Labor 

Expense 

/ 

, 

Hrs. 

Amt. 

Rate 

Amt 

Hrs. 

Amt. 

Rate 

Amt. 

Hrs. 

Amt. 

Rate 

Amt. 

1 

Shear 

| 

Punch 

1 

Form  Eye 

| 

Ream 

Trim 

Saw  and  Bead 

. ,.  — 

i 

- 



'    1        " 

— , — i 

I 

— 

Total  Labor 

j 

Total  Expense 

Steel 

1   / 

Lbs. 

\  1 

Lbs. 

1| 

Lbs. 

Lbs. 

\ 

Purchased  Parts 

L 

' — . 

1 J 

H 

Total  Mfg.  Cost 

1 

Freight 

Normal  Selling  Expense 

Total  Cost 

Form  77 

1 

i 

"standard."  One  does  not  get  a  standard  by  merely  measuring 
or  weighing  a  certain  number  of  the  products,  already  made, 
for  in  some  of  those  the  amount  of  material  may  be  excessive 
and  thus  the  result  instead  of  avoiding  future  waste  would  only 
extend  bad  practices  of  the  past  into  the  future.  One  foundry 
lost  $20,000  a  year  through  adopting  a  standard  weight  from  a 
group  of  castings  all  of  which  were  grossly  overweight. 


KEEPING  TRACK  OF  MATERIALS 


226 


The  standard  may  relate  to  the  use  of  material  or  to  break- 
age. The  bonus  should  be  planned  to  reward  speed  but  also  to 
penalize  imperfect  work  to  such  an  extent  that  only  the  operative 
who  is  both  fast  and  careful  can  have  the  reward.  Therefore 
one  fixes  ratios  of  imperfect  to  perfect  work  and  of  total  waste 
to  perfect  production.  This  double-barreled  system  guards 
against  both  kinds  of  waste — the  waste  of  "seconds"  and  com- 
plete waste  or  spoilage. 

Standardizing  to  Prevent  Waste.  Take  the  cutting  of  cloth : 
We  have  watched  the  cutting  and  piling  of  countless  garments 


FINAL  COST 

CONTRACT  NO.                    DESCRIPTION 

Part  Name,  Drawing  Number  or  Symbol 

Material 

Labor  and 
Expense 

—        — 

Total  Labor  and  Expense 

$ 

Total  Material 

$ 

Total  Factory  Cost 

$ 

Sold  @ 

$ 

%  Selling  Expense 

$ 

Net  Selling  Price 

$ 

Profit  or  Loss 

Form  78   | 

and  almost  without  exception  we  find  the  cutter  moved  by  a 
spirit  of  generosity.  He  leaves  a  margin  of  safety  for  the  un- 
known future  customer.  Or  the  cloth  may  be  wrinkled  and  not 
sufficiently  smoothed  before  cutting.  Either  way  the  average 
excess  will  run  from  one  eighth  to  one  half  an  inch  per  garment. 
I  have  seen  it  run  far  in  excess  of  one  half  inch. 


226  BUSINESS  ACCOUNTANCY 

No  useful  purpose  is  served.  If  a  shirt  is  cut  to  a  pattern 
assumed  to  be  correct  in  size,  the  added  length  is  useless. 

But  from  the  manufacturer's  standpoint  a  difference  of  one 
quarter  of  an  inch  per  shirt  is  a  momentous  matter.  Consider 
500,000  to  1,000,000  garments  per  year;  125,000  to  250,000 
inches  of  knit  cloth  per  year  wasted.  Multiply  that  by  the 
average  cost  of  the  cloth. 

This  waste  has  been  minimized  by  the  installation  of  a  bonus 
to  the  cutter  based  on  the  quantity  of  cloth  used  against  the 
standard  that  should  be  used. 

For  many  years  manufacturers  have  charged  the  same  price 
for  clothing,  regardless  of  the  size,  except  for  the  break  between 
misses'  and  women's  sizes  and  between  boys'  and  men's.  The 
same  has  been  true  of  shoes.  It  is  self-evident  that  the  larger 
sizes  must  take  more  cloth  than  the  smaller  and  hence  must 
cost  more  to  make;  the  argument  has  been  that  the  whole  thing 
averages  up  in  the  end.  It  averages  only  if  the  sales  happen  to 
fit  the  sizes.  With  shrewd  buyers  the  sales  do  not  fit  the  sizes; 
the  manufacturer  with  exact  costs  will  charge  somewhat  less  for 
the  small  sizes  than  does  the  man  without  costs;  also  he  will 
charge  a  higher  than  the  flat  price  for  the  big  sizes.  The  expert 
buyer  takes  the  little  sizes  from  the  cost  man  and  the  big  ones 
from  the  flat  price.  Thus  the  biggest  trade  of  the  man  without 
costs  will  be  in  the  goods  upon  which  he  either  makes  no  profit 
or  has  a  loss.  I  recall  a  case  of  a  knit-goods  manufacturer  who 
sold  at  a  flat  price;  his  profit  per  dozen  on  size  36  was  25  cents, 
on  38  it  was  7  cents  and  on  size  40  the  loss  was  10  cents.  Exact 
costs  either  prevent  flat  prices  or  insist  on  selling  lots  assorted 
so  that  a  profit  will  be  made  on  the  whole. 

Plans  That  Reduce  Waste.  Take  a  similar  case  in  a  hat  fac- 
tory. Each  girl,  whose  task  it  was  to  encircle  the  hat  with  a  ribbon 
and  prepare  a  bow,  was  given  a  roll  of  ribbon  from  which  she 
drew  the  amount  required.  Almost  invariably,  when  cutting  off 
the  length,  a  quarter  or  a  half  inch  or  even  more  of  additional 
ribbon  was  cut  off  as  a  margin  of  safety,  it  being  admittedly 
difficult  to  judge  the  precise  amount  required  until  the  ribbon 
was  "tacked"  on,  particularly  as  it  was  necessary  to  cut  the 
ribbon  before  fastening  it  on  the  hat. 

A  method  was  devised  by  which  the  operator  sewing  on  the 
bands  and  bows  was  supplied  with  ribbon  cut  to  length;  a  pro- 
ceeding that  saved  the  operators  considerable  time.    As  the 


KEEPING  TRACK  OF  MATERIALS  227 

storekeeper  supplying  the  ribbon  was  furnished  with  gages  of 
the  precise  lengths  required,  she  was  able  easily  to  cut  the  rib- 
bon to  the  desired  sizes  without  a  bit  of  waste. 

At  the  end  of  the  year  it  was  found  that  the  cost  of  the  rib- 
bon used  upon  hats  corresponding  in  number  with  the  quantity 
completed  in  the  previous  year  had  been  reduced  by  about  $800 
which  may  well  be  considered  a  worth-while  saving. 

Sandpaper  is  a  common  commodity  and  is  used  in  many 
plants.  To  a  workman,  particularly  one  on  a  wage  incentive 
basis,  it  is  easier  to  employ  fresh  paper  and  toss  it  aside  without 
entirely  wearing  out  the  sanded  surface,  than  it  is  completely 
to  use  the  paper.  In  some  factories  where  a  huge  amount  of 
sandpaper  is  required,  this  unused  proportion  can  amount  to  a 
very  consequential  figure.  The  loss  can  be  reduced  in  several 
ways,  of  which  the  following  are  three: 

Cut  the  sandpaper  so  that  all  of  the  paper  in  hand  will  be 
applied  to  the  surface  to  be  sanded,  thereby  eliminating  the 
generally  unused  outer  margin. 

If  the  work  is  sufficiently  uniform  to  enable  the  amount  of 
paper  that  should  be  used  to  be  estimated  with  fair  accuracy, 
supply  paper  to  the  extent  required,  offering  a  bonus  of  a  part 
of  the  value  of  the  paper  saved. 

If  a  piece  rate  exists,  charge  against  the  workman  the  sand- 
paper given  him  and  allow  in  the  piece  rate  sufficient  to  com- 
pensate him.  He  will  not  use  sandpaper  after  it  has  lost  its 
working  value,  for  that  would  decrease  his  piece-work  earnings; 
nor  will  he  throw  the  paper  away  needlessly,  for  he  will  regard 
it  as  his  own  and  appreciate  its  cost. 

Silk  thread  in  a  sewing  room  is  always  a  source  of  loss.  In 
most  cases  women  operatives  are  employed  and  silk  thread  can 
always  be  used  in  the  home,  so  that  despite  checking  precautions, 
countless  spools  of  silk  find  their  way  out  of  the  factory.  More- 
over, inspection  of  garments,  gloves,  and  so  on,  almost  invaria- 
bly reveals  long  ends  at  the  finish  of  a  hem  or  seam,  these  fre- 
quently exceeding  in  length  the  thread  actually  used  in  the 
stitches.  Such  ends  are  later  clipped  by  inspectors  or  finishers 
and  prove  to  be  practically  an  entire  loss. 

To  avert  this  loss,  as  in  the  sandpaper,  the  silk  can  be  charged 
to  the  employee  and  the  rate  paid  made  to  cover  that  properly 
used.  This  has  the  effect  of  rendering  cautious  the  user  of  the 
silk  and  making  thievery  objectless. 


228  BUSINESS  ACCOUNTANCY 

In  large  printing  establishments  the  ink  is  dipped  out  of  cans 
and  applied  to  the  ink  plate  of  the  presses.  This  "dipping" 
process  almost  invariably  leaves  a  fraction  of  the  ink,  which  is 
of  a  heavy  consistency,  in  the  can  around  the  sides  and  on  the 
bottom.  The  cans  can  be  soaked  in  a  solution,  which  in  turn 
is  poured  into  a  concentrating  tub  or  larger  can.  When  the  ink 
has  settled  to  the  bottom  the  solution  can  be  poured  off  and  the 
ink  used. 

Solder  has  become  very  costly,  yet  its  use  continues  in  can- 
ning factories  and  many  other  places  such  as  in  the  making  of 
railroad  lanterns,  some  kitchen  utensils,  and  so  forth.  Ordi- 
narily an  enormous  amount  is  wasted  by  reckless  "slobbering." 
Tests  have  shown  this  waste  to  run  over  150%.  It  is  possible 
to  standardize  the  amount  to  be  used  and  pay  the  workmen  a 
bonus  to  prevent  waste.  There  have  been  instances  of  a  saving 
of  from  $400  to  S500  to  a  man  in  a  year. 

The  amount  of  copper  or  brass  wire  used  in  electrifying  lamps, 
and  many  other  items,  can  be  lessened  by  careful  cutting  to 
size  by  one  person  assigned  to  the  task  and  who  is  offered  a  bonus 
for  quantity  saved,  instead  of  following  the  common  practice  of 
having  each  operative  snip  from  a  bolt  or  reel  the  amount  desired. 

The  above,  more  or  less  random  examples,  should  serve  to 
show  the  possibilities  which  exist  in  the  way  of  standardization 
to  prevent  waste. 

Charging  Scrap.  A  certain  amount  of  scrap  is  inevitable 
in  many  operations.  Whether  this  is  to  be  considered  as  waste 
and  the  scrap  value  charged  into  the  overhead  expense,  or  whether 
the  scrap  should  be  credited  against  the  cost  of  the  article,  de- 
pends upon  circumstances. 

Waste  should  always  be  localized  unless  it  is  of  such  slight 
value  that  it  will  cost  more  to  localize  it  than  to  disregard  it. 
For  instance,  if  an  iron  casting  which  weighs  four  pounds  is 
reduced  to  three  pounds  in  the  process  of  machining,  there  must 
be  one  pound  of  waste.  But  this  pound  of  cutting  has  scarcely 
any  value.  In  fact  it  scarcely  pays  for  the  trouble  of  sweeping 
it  up  and  taking  it  away.  Therefore  we  carry  through  on  the 
cost  sheet  the  original  weight  of  the  casting  as  four  pounds,  for 
that  is  really  the  amount  of  material  which  went  into  it.  The 
waste  is  then  credited  to  overhead  account  because  the  cost  of 
removing  it  is  an  overhead  expense  and  it  should  help  pay  the 
cost  of  getting  it  out  of  the  place. 


KEEPING  TRACK  OF  MATERIALS  229 

If,  however,  that  casting  had  been  made  of  brass,  or  some 
other  expensive  metal,  the  waste  would  have  considerable  value. 
If  the  value  of  the  brass  waste  were  not  deducted,  the  owner 
would  have  a  cost  for  his  finished  casting  which  would  be  con- 
siderably above  its  actual  cost.  He  would  lose  business  because 
he  did  not  know  the  real  margin  of  profit. 

Many  otherwise  good  cost  systems  fail  because  of  an  incorrect 
absorption  of  the  scrap  or  waste.  Scrap  presents  one  of  the 
most  difficult  and  elusive  of  problems. 

In  formulating  a  plan  for  the  gathering  of  scrap  data  and 
determining  a  method  for  the  distribution  of  losses,  the  following 
points  should  be  considered: 

1.  Margin  of  loss  existing  between  the  purchase  price  as 
good  raw  material  and  its  value  when  sold  as  scrap  or  again  used 
in  some  other  product. 

2.  Quantity  of  scrap  produced. 

3.  The  proportion  of  scrap  found  necessary  to  perform  an 
operation,  without  spoilage  being  a  factor,  as  instanced  in  press 
work,  in  the  blanking,  piercing,  and  trimming  operations. 

4.  The  amount  of  work  spoiled  due  to  carelessness  on  the 
part  of  the  operator,  defects  in  the  material,  and  so  on. 

5.  Possibility  of  reuse  as  illustrated  in  foundry  work,  yarn 
spinning,  the  manufacture  of  candy,  paper,  and  the  like. 

6.  The  amount  of  labor  and  expense  lost  on  spoiled  work. 

7.  The  plan  of  collecting  costs. 

8.  The  difficulty  in  determining  accurately  the  scrap 
produced. 

There  are  a  number  of  factors  that  must  be  considered  before 
deciding  on  a  definite  program.  One,  not  mentioned  above, 
but  deserving  special  attention,  is  the  thorough  study  of  the 
product  and  processes. 

There  are  three  generally  accepted  methods  of  distributing 
the  scrap  loss. 

The  first  method  is  to  make  the  charge  direct  to  the  part  or 
the  article.  Such  a  procedure  should  invariably  be  adopted 
where  the  loss  is  a  heavy  one.  The  fabrication  of  sheet  brass, 
copper,  and  aluminum  into  finished  articles  is  an  illustration. 
The  per  pound  loss  on  copper,  when  sold  as  scrap,  for  example, 
varies  from  3  cents  to  9  cents  a  pound,  depending  on  the  amount 
of  extras,  such  as  rolling  mill  charges,  freight,  special  widths, 


230  BUSINESS  ACCOUNTANCY 

gages,  finishes,  and  so  forth.  The  exact  amount  of  scrap  must 
be  known  and  absorbed  by  each  part  or  article.  It  is  often 
desirable  to  detail  such  losses  by  operations. 

A  second  method  is  where  costs  are  procured  by  lots  or 
orders,  as,  for  example,  in  the  spinning  of  cotton,  woolen  or 
worsted  yarns,  in  the  manufacture  of  paper,  food  products, 
candy,  and  allied  industries.  The  good  units  produced  must 
bear  all  of  the  scrap  losses  entailed. 

A  third  method  is  sometimes  employed,  where  the  value  of 
the  scrap  produced  is  small.  This  is  true  in  the  manufacture  of 
sheet  steel  and  tin  plate  products  and  certain  woodworking 
industries.  Where  this  method  is  applied,  the  article  is  charged 
with  the  gross  material  used.  The  scrap  credit  is  effected  by 
lessening  the  manufacturing  expense,  crediting  this  account 
with  the  selling  value  of  the  scrap.  If  a  varied  line  is  manu- 
factured, care  must  be  exercised  to  distribute  the  credit  only  to 
the  articles  originally  charged  with  the  gross  material  cost. 

It  is  the  exceptional  industry  where  the  scrap  loss  is  less 
than  2%.  Generally  it  is  considerably  more;  yet  it  is  usually 
glossed  over  or  distributed  unfairly  on  a  uniform  per  cent  basis 
resulting  in  inaccurate,  unreliable  costs. 

Often  Salvaging  Pays.  The  intelligent  sale  of  scrap  will 
warrant  attention  in  almost  any  business.  Some  of  the  material 
which  goes  into  the  heap  may  be  reclaimed  and  all  the  scrap 
will  bring  a  better  price  if  sorted.  The  returns  on  salvaging  are 
often  considerable. 

One  of  the  greatest  difficulties  in  the  cost  accounting  of 
materials  is  where,  in  the  process  of  manufacturing,  the  identity 
of  the  original  material  is  lost  (as  in  many  laboratory  operations) 
or  where  the  finished  product  comes  out  in  several  grades. 

Take  the  packing  of  cherries.  These  may  all  be  bought  at 
the  same  price  and  are  presumably  of  the  same  quality.  But 
they  must  be  sorted  into  various  sizes  and,  in  the  end,  the  material 
which  started  as  one  grade  is  divided  into  10  or  12  different 
grades,  each  of  which  may  take  a  different  kind  of  packing  and 
each  of  which  commands  a  different  price. 

If  we  say  that  because  the  original  commodity  had  a  certain 
price,  that  the  12  different  grades  have  each  the  same  cost,  we 
reach  the  position  that  part  of  our  product  is  being  sold  at  a  very 
high  profit  and  another  part  at  a  considerable  loss.  We  neglect 
to  note,  in  such  reasoning,  that  the  labor  on  the  higher  grades  is 


KEEPING  TRACK  OF  MATERIALS  231 

very  careful  and  therefore  costs  more  than  on  the  lower  grades. 

Here  is  the  proper  method.  Suppose  we  buy  200  pounds  of 
the  article  at  $10  per  100  pounds;  the  cost  is  $20.  This  goes  out 
as  100  pounds  of  first-class  material  that  sells  at  $20  and  100 
pounds  of  second-class  material  which  sells  at  $10.  The  first- 
class  material  costs  $3  for  labor  and  expense,  which  gives  a  selling 
price  less  fabricating  cost,  of  $17.  The  second  grade  costs  $2 
for  labor  and  expense,  or  a  net  selling  price,  less  fabricating  cost, 
of  $8.  How  should  the  material  costs  be  distributed?  The  net 
selling  price  of  the  higher  grade  is  2  3/g  times  as  great  as  that  of 
the  second,  therefore  it  takes  2%  times  as  much  of  the  raw 
material  cost. 

The  same  principle  of  calculation  goes  through  the  deter- 
mining of  the  cost  of  all  food  products;  in  fact,  of  any  product 
which  turns  out  in  several  grades.  That  which  might  be  con- 
sidered as  a  loss  on  the  inferior  product  is  shifted  over  to  the 
better  product,  so  that  each  will  bear  only  its  proper  proportion. 
It  is  true  that  the  material  cost  for  each  was  superficially  the 
same,  but  it  is  not  true  that  the  final  cost  of  the  material  is 
identical.  That  original  commodity  has  resolved  itself  into  dif- 
ferent grades.  Ostensibly  we  had  purchased  but  one  kind  of 
cherries;  as  a  matter  of  fact,  we  bought  merely  a  bulk  amount 
and  then,  later,  discovered  exactly  what  we  were  buying. 

Through  the  many  different  examples  which  I  have  cited, 
it  might  seem  that  material  cost  was  not  so  ingenuous  as  I  first 
stated.  But  the  principles  are  all  very  clear,  and  the  applica- 
tions, reduced  to  these  elements,  are  simple  enough.  I  have 
given  no  fixed  principles,  but  examples  instead — only  to  prevent 
the  reader  from  imagining  that  one  method  might  fit  all  cases. 


CHAPTER  XVII 

HOW  TO  FIGURE  THE  COST  OF  LABOR 

IABOR  falls  into  two  divisions — the  direct  or  productive 
i  labor,  and  the  indirect  or  non-productive  labor,  on  exactly 
the  same  theory  as  in  the  division  of  material  and  supplies. 
The  direct  labor  is  a  charge  against  the  job,  while  the  indirect 
goes  to  the  departmental  overhead.  For  the  same  reasons  that 
governed  the  disposition  of  material,  the  constant  effort  of  a 
cost  accountant  is  to  regulate  the  indirect  labor,  so  that  it  may  be 
put  upon  a  specific  job  instead  of  being  averaged.  Always — it 
cannot  be  too  often  pointed  out — the  effort  in  cost  accounting 
is  to  charge  directly,  and  to  leave  as  few  items  as  possible  to 
apportionment. 

The  mere  cost  accounting  of  labor  does  not  involve  even  the 
few  difficulties  that  attend  the  recording  of  material.  The  purely 
mechanical  side  of  the  payment  of  labor — the  making  up  of  the 
payroll,  the  manner  of  payment,  and  the  like — have  already 
been  taken  up  in  Chapter  VI,  and  the  methods  there  given  should 
be  read  in  connection  with  this  chapter.  The  basis  on  which  to 
pay  operatives — a  day  rate,  an  hour  rate,  by  piece  work,  or  by 
a  combination — the  matter  of  bonus,  profit  sharing,  and  the  like, 
and  the  selection  of  the  best  plan  for  your  own  particular  needs 
are  immense  subjects  in  themselves.  Getting  the  best  out  of 
labor  is  no  part  of  cost  accounting,  but  the  comparisons  which 
inevitably  flow  from  the  adoption  of  a  cost  system  will  shortly 
direct  executive  attention  to  labor.  I  do  not  know  of  a  single 
cost  installation  which  could  not  eventually  put  the  men  on 
some  kind  of  an  incentive  basis;  that  is,  put  the  men  in  a  position 
where  extra  effort,  either  in  the  way  of  care,  or  of  increased 
production,  or  both,  is  rewarded  by  additional  payment  to  the 
mutual  advantage  of  the  employers  as  well  as  to  the  men. 

Paying  Productive  and  Non-Productive  Labor.  The 
common  arrangement  is  to  have  an  incentive  plan  of  payment 
for  productive  labor  and  charge  the  non-productive  labor  at 

232 


ACCURATE  LABOR  COST  233 

hour  or  day  rates.  I  cannot  suggest  any  particular  plan  which 
will  always  apply  under  all  conditions  and  to  every  grade  of 
employee.  There  is  no  such  plan,  and  I  doubt  if  any  factory 
will  find  it  advantageous  to  maintain  a  uniform  system  through- 
out its  whole  plant.  Some  incentive  is  always  beneficial  in 
productive  labor,  but  piece  work  is  by  no  means  the  only  way 
out.  The  balance  between  care  and  speed  is  a  nice  one;  and,  as  I 
have  shown  in  Chapter  XVI,  the  end  of  the  manufacturer  is  to 
attain  a  maximum  production  of  first-class  commodities,  and 
not  merely  a  maximum  production. 

The  right  plan  can  always  be  found  and  it  is  worth  seeking 
far  and  wide.  Do  not  merely  "guess"  that  your  plan  is  all 
right.  Know.  And,  if  you  have  piece  rates,  know  that  they  are 
equitable.  Piece  work  is  somewhat  worse  than  useless  unless 
the  rates  are  carefully  set.  If  the  unit  pay  is  too  low,  the 
employee  becomes  dissatisfied;  if  it  is  too  high,  your  employees 
will  quickly  find  that  fact,  and  instead  of  exerting  themselves  to 
gain  the  highest  possible  wages,  will  devote  considerably  more 
attention  to  trying  to  "get  away"  with  the  high  rate.  I  think 
that  at  least  90%  of  the  rates  in  the  United  States  are  inequitable 
either  to  the  employer  or  to  the  employee,  and  often  to  both. 

Take  a  glaring  instance  from  a  large  plant  which  I  investi- 
gated not  long  since.  The  employees  of  this  and  several  asso- 
ciated plants  numbered  over  3,000,  the  majority  being  unskilled 
help,  both  men  and  women. 

We  made  a  careful  time  study  of  a  number  of  representative 
operations  among  employees  of  an  equal  grade.  We  found  what 
each  could  turn  out  if  100%  efficient.  We  multiplied  their 
possible  output  by  the  piece-work  rate. 

This  is  what  each  could  earn: 

WOMEN 
Rate  per  1,000    Pieces  per  day    Possible  earning 

A $0.13  13,500  $1.75 

B .13  11,570  1.50 

C .33  2,700  .89 

D .43  2,314  1.00 

E .43  3,115  1.35 

F 1.33  1,723  2.30 

G 3.00  1,409  4.23 

H 1.67  406  .68 

1 4.67  315  1.48 

J .30  5,786  1.72 


234  BUSINESS  ACCOUNTANCY 

MEN 

Rate  per  1,000     Pieces  per  day    Possible  earning 

A $1.25  2,000  $2.50 

B 2.00  1,256  2.51 

C .40  1.514  .61 

D .50  8,100  4.05 

E .26H  10,125  2.68 

F .46  8,100  3.73 

G .46  9,530  4.38 

H .23  11,570  2.66 

Such  rates  as  these  are  hopelessly  unfair  and  can  result 
only  in  general  condemnation  of  all  piece-work  plans.  Here 
exactly  the  same  output  of  time  and  skill  might  bring  a  man 
anywhere  from  61  cents  to  $4.38  a  day,  with  a  similar  range  for 
women,  except  that  the  lowest  rate  for  women  was  higher  than 
the  lowest  rate  for  men ! 

No  one  had  ever  thought  to  check  up  the  rates.  They  had 
been  arbitrarily  set  and  then  forgotten.  The  foreman  is  supposed 
to  know  the  rate  basis.  But  how  often  does  he  know?  I  find 
that  foremen  generally  set  rates  simply  on  the  performance  of 
the  best  operator  and  without  a  thought  of  the  actual  motions 
involved. 

Proper  rates  are  to  be  had  only  after  a  time  study  to  determine 
the  possible  output  with  a  liberal  allowance  for  personal 
necessities.  Treating  a  man  solely  as  a  machine  results  in  a 
poor  machine. 

Charging  Direct  Labor.  Whatever  basis  of  payment  be 
adopted,  the  direct  labor  charge  goes  to  the  operation.  If  piece 
work  is  in  vogue,  the  amount  to  charge  for  labor  is  automatically 
fixed  by  the  rate.  Otherwise  the  time  must  actually  be  entered; 
there  are  many  excellent  methods  of  arriving  at  this  end. 

I  do  not  as  a  rule  favor  any  plan  which  provides  a  separate 
tag  for  each  job,  and  on  which  tag  the  labor  is  enteied,  either 
by  the  men  themselves  or  by  the  timekeeper  or  foreman,  when 
the  operation  is  finished.  The  place  for  the  cost  summary  card 
is  the  office. 

A  form  of  time  card  which  has  given  splendid  results  wherever 
used  is  Form  79.  Each  card  covers  but  a  single  job  and  the  form 
is  more  particularly  designed  for  a  shop  in  which  the  lots  are 
of  fair  size,  so  that  not  more  than  one  or  two  cards  will  be  needed 
during  the  day.  Of  course  it  is  entirely  possible  to  make  divisions 
so  that  several  lots  may  be  covered  by  the  same  card.    But  the 


ACCURATE  LABOR  COST 


235 


form  is  immaterial;  the  point  is  to  get  something  which  meets 
your  conditions.  The  valuable  portion  of  the  card  shown  is  the 
division  into  hours  and  tenths  of  hours.  When  a  workman  starts 
he  puts  an  X  on  the  starting  time  and  when  he  finishes  he  puts 
an  O  in  the  proper  square.  If  the  workman  or  the  timekeepe, 
were  permitted  actually  to  write  in  the  starting  and  the  finishing 
times,  accurate  timekeeping  would  never  be  had.  They  will 
conceal  the  time  between  jobs. 

One  job  does  not  always  instantly  follow  another.  There  is 
always  some  waiting  time  between  jobs,  and  unless  this  waiting 
time  appears  in  the  records,  the  cost  will  not  be  true.  The 
waiting  time  is  part  of  the  shop  overhead  and  to  charge  it  to  the 
next  job  is  unduly  to  increase  labor  and  also  to  blind  the 
executives  to  the  time  which  is  being  wasted.  The  blank 
squares  between  the  finish  of  one  job  and  the  start  of  the  next, 
represent  the  idle  hours  and  are  posted  to  an  idle  hour  card. 


"X"  START                                                              "0"  FINISH 

CO 

z 
z 
e= 
o 
Z 

7 

706 

712 

718 

724 

730 

736 

742 

748 

754 

iRTiriF  NAMF 

8 

806 

812 

818 

824 

830 

836 

842 

848 

854 

DEPARTMENT 
nnnFR  no 

DATF 

9 

906 

912 

918 

924 

930 

936 

942 

948 

954 

10 

1006 

1012 

1018 

1024 

1030 

1036 

1042 

1048 

1054 

flPFRATHlM 

11 

1106 

1112 

1118 

1124 

1130 

1136 

1142 

1148 

1154 

12 

Z 
o 
o 
z 
cc 
u 

t 

1 

106 

112 

118 

124 

130 

136 

142 

148 

154 

2 

206 

212 

218 

224 

230 

236 

242 

248 

254 

flllJNTITV   $T4RTFII 

3 

306 

312 

318 

324 

330 

336 

342 

348 

354 

QUANTITY   FINISHFD 

4 

406 

412 

418 

424 

430 

436 

442 

448 

454 

QUANTITY  spniirn 

5 

506 

512 

518 

524 

530 

536 

542 

548 

554 

6 

606 

612 

618 

624 

630 

636 

642 

648 

654 

7 

TIME 

RATE 

WAGE 

O.K. 

FOREMAN 

HOURS    |  TENTHS 

Fo 

rm 

79 

Keeping  Time.  In  larger  establishments  and  even  in 
many  small  factories,  the  mechanical  timekeepers  may  be  used  to 
advantage  and  they  may  be  operated  by  a  timekeeper  or,  if  the 
number  of  employees  is  small,  by  the  foreman. 

In  any  event  the  time  should  be  entered  when  the  labor  is 
performed.  Leaving  all  the  records  to  the  end  of  the  day  is 
fatal  to  accurate  costs.    If  you  find  your  foreman  with  a  bunch 


236 


BUSINESS  ACCOUNTANCY 


of  cards  in  front  of  him,  just  after  quitting  time,  guessing  that 
Jim  spent  so  many  hours  on  that,  and  Mike  so  many  hours  on 
this,  you  may  take  for  granted  that  your  cost  system,  insofar  as 
the  labor  end  is  concerned,  is  only  an  exercise  in  mathematics. 

The  labor  cards  go  through  the  departments  to  the  payroll 
clerk  who  checks  up  with  tne  time  clock  and  makes  the  necessary 
records  for  the  payroll.  Then  the  cards  pass  to  the  cost  depart- 
ment and  are  entered  on  the  proper  cost  sheets  and  filed  as 
subsidiary  records  to  these  sheets. 

A  convenient  wrinkle  in  translating  the  men's  time  into 
dollars  is  given  in  Form  80.  The  tables  are  of  celluloid  or  other 
transparent  material,  one  being  provided  for  each  rate,  and  are 
arranged  on  the  principle  of  the  slide  rule  to  quicken  the  cal- 
culations and  to  minimize  error. 


"X"  START                                                              "0"  FINISH 

Ml 

2 
Z 

7 

706 

712 

718 

724 

730 

736 

742 

748 

754 

8 

80S 

812 

818 

&24 

830 

836 

842 

848 

854 

ARTICLE  NAM 

p 

9 

906 

912 

918 

024 

930 

i36 

942 

948 

954 

DEPARTMENT                             \ 



' 

1 

10 

0 

1 

2 

3 

4 

5 

« 

7 

8 

9  f  . 

•    1 

2 

3 

4 

5 

11 

7 

m 

9 

10 

tl 

12 

13 

14 

16 

18 

17 

18 

19 

11 

12 

13 

14 

15 

1 

106 

112 

118 

124 

130 

138 

142 

148 

154 

\, 

28 

29 

21 

22 

23 

24 

{ 

25 

2| 

27 

28 

29 

30 

31 

32 

3f. 

34 

33 

38 

37 

38 

39 

31 

32 

33 

34 

35 

38 

39 

40 

41 

42 

43 

44 

45 

48 

47 

48 

49 

50 

3 

37 

41 

42 

43 

44 

45 

4 

}« 

48 

49 

50 

51 

52 

53 

54 

55 

58 

57 

58 

59 

51 

52 

53 

54 

55 

5 

r 

58 

59 

60 

61 

62 

83 

64 

65 

68 

67 

r  68 

69 

81 

62 

63 

64 

A 

6 

h 

68 

69 

70 

71 

72 

73 

74 

75 

78 

77 

78 

79 

71 

72 

73 

74 

75 

^T 

77 

78 

79 

80 

.81 

82 

83 

64 

85 

86 

87 

88 

89 

' 

81 

82 

83 

84 

85 

88 

87 

88 

89 

90 

91 

92 

»3 

94 

95 

98 

97 

98 

99 

fcUl-, 

.93 

94 

95 

88 

87 

98 

99 

100 

Bate  TO  cents  an  Hour 

Form  8 

*— ^ — : — ■ — — -^— — - — — ^~ — — L-— - 

A  useful  check  on  the  efficiency  of  the  labor  is  the  operation 
cost  record  shown  in  Form  81.  The  actual  time  for  each  operation 
is  here  entered  by  the  cost  clerk,  and  the  performance  in  the 
factory  compared  with  the  standard  times.  The  standard  times, 
of  course,  have  been  set  by  time  studies  expertly  made  as  already 
described.  The  relation  of  the  actual  to  the  standard  time 
gives  the  efficiency  percentages,  and  if  these  percentages  are  low, 
an  investigation  is  in  order.    A  low  percentage  of  efficiency  may 


ACCURATE  LABOR  COST 


237 


mean  that  the  labor  is  at  fault.  I  say  "may"  because  that  con- 
clusion should  not  be  jumped  at;  there  may  be  a  dozen  other 
reasons  for  the  low  record,  any  one  of  which  will  bear 
investigation. 

The  foregoing  labor  records  are  part  of  a  cost  system  which 
revolves  around  a  production  unit  or  a  labor  dollar.  But  if  the 
machine  hour  basis  is  used,  then  it  is  the  time  of  the  machines 
which  is  important  and  the  labor  is  only  incident  to  the  running 
of  these  machines.  Form  82  groups  the  labor  and  machines 
and  also  provides  for  the  final  machine  costs,  spaces  being 
provided  for  the  apportioning  of  the  fixed  charges — power  and 
other  expense  items  which  the  particular  machine  absorbs. 
The  averages  of  the  machine  performance,  made  up  at  the  foot 
of  the  column,  will  afford  valuable  comparisons. 


)J                  OPERATION  COST  RECORD 

flparalinn                                    Standard  Tima 

Opej\ — 

Op«ratlnn                                 Standard  Tima                            _ 

Duo 

Order 

or  Lot 

No. 

Oper- 
ator 
No. 

Doz- 
en* 

Time 

Dayor 
Piece 
Rate 

Wage 

Cost 
Dozen 

Hourly 
Earn- 
ings 

Dozen 
►Cr 

Eff. 

Date  I 

£ 

Date 

Oriter 
or  Lot 
No. 

Oper- 
ator 
No. 

Coz- 
ens 

Time 

Day  or 
Piece 
Rate 

Wage 

Cost 
per 
Dozen 

Hourly 
Earn- 
ings 

)ozen  « 
Hour  ™- 

hT 

10th 

H 

•VMi 

j 

1 

i 

OpfKt'On.                                 Standard  Tlmf 

Oper] 

L 

Operation 

Unit  Averages 

j 

\ 

i 

j 

/ 

L 

\ 

TotBl  Part 
Productive 

Form  81 

J 

i 

Lata 

rCojt 

The  operations  of  all  machines  go  to  a  summary  as  in  Form 
83  in  which  the  actual  hours  used  are  compared  with  the  avail 
able  hours  and  the  percentages  are  derived.  The  percentage  of 
actual  to  available  hours  will  often  be  most  surprising.  You 
will  probably  be  at  a  loss  to  decide  whether  you  have  been  sup- 
porting the  machine  or  the  machine  has  been  supporting  you! 

The  summaries  and  comparisons  which  cost  accounting 
affords  on  so  many  different  points  are  an  invaluable  aid  to 
better  business  and  therefore  to  better  profits. 


238 


BUSINESS  ACCOUNTANCY 


Non-Productive  Labor.  The  non-productive  labor,  not 
being  chargeable  to  a  specific  job,  involves  in  its  recording  only 
the  starting  and  finishing  time — usually  the  beginning  and  the 
close  of  the  working  day — and  the  charge  to  the  proper  depart- 
ment. If  the  operatives  work  continuously  for  one  department, 
a  card  is  scarcely  necessary;  if,  however,  they  work  part  of  the 
day  on  an  overhead  to  department  A  and  the  remainder  of  the 
day  on  an  overhead  going  to  department  B,  then  a  card  should 
be  made  out  in  order  that  departments  A  and  B  may  each  obtain 
the  proper  share  of  overhead. 


MACHINE  OPERATION  RECORD 

Mnnth  of                        1<11 

Machine  Number                      Machine  Number                 Machine  Number                 Machine  Number 

Operator        Helpers 

_       „ '  Operator    :    Helpers      „        ,,     Operator  |;    Helpers      _        „ 
^^"i'Hrs.   Amt'Hrs.    Ami   P,yr°"  ■  Hrs.!  Arm..''  Hrs.  i^,**""} 

Operator       Helpers 

Plyr0":Hrs.    Arm.    Hrs-'Amt. 

Hrs.    Amt. 

Hrs.   Amt. 

e 
a 

■i 

No.      |j 

No.                                                    No.                                                    No. 

No. 

;      ,    t ',  no.    ;                    i    no. 

i  No.     | 

No.      1 

I  ■'  No.                                          1      No.     jl 

J  No. 

no.    : 

No.                                          '    ■   No.     .! 

No. 

No. 

No.                                          ■      No.    J 

|  No.      '1 

No. 

No.       ■ 

No.     'I 

I)  No.. 

No. 

No. 

No. 

No. 

Total  ■ 

Il           1 

Total  Labor 

1 

Power 

' 

1 

Fued  Charges 

1 

Repairs 

ll 

. 

i 1 — n — m — ""             I — 1    P ' — ir~ 

] — —                         " 

Share  of  Department  and 
General  Expense 

Total  Actual  Machine 
Cast 

Actual  Cost  per  Hour 

Share  of  Department  and  ' 
General  Expense   Aver.)  ll 

Total  Average  Machine     1 
Cost 

Average  Cost  per  Hour 

Fon 

ii82  | 

Since  the  indirect  labor  is  not  charged  directly  to  a  job,  it 
is  often  imagined  that  wage  incentives  cannot  be  used;  but,  on 
the  contrary,  they  quite  often  can  be  used  to  great  advantage. 

Who  knows  just  what  he  is  getting  out  of  the  cleaners,  and 
shippers  and  truckers?  In  most  factories  this  type  is  from  10% 
to  33%  of  the  whole.    Take  one  shipping  and  receiving  gang. 

Their  work  was  so  complex  that  it  had  not  been  considered 
possible  to  devise  a  wage  incentive.  The  difficulty  arose  from  the 
numerous  sizes  of  packages  and  cases  in  which  the  finished 
product  was  shipped,  the  number  and  location  of  the  finished 
stock  warerooms  and  shipping  platforms,  and  the  variable 
distances  which  had  to  be  covered  by  the  truckers. 


ACCURATE  LABOR  COST 


239 


There  existed  approximately  100  different  kinds  of  packages 
to  be  handled  between  seven  store  rooms  and  nine  shipping 
points,  some  of  the  storage  rooms  being  up  four  floors.  As  any 
of  the  finished  articles  might  be  stored  in  any  one  of  the  ware- 
rooms  and  have  to  be  delivered  to  any  of  the  shipping  platforms, 
there  were  theoretically  6,300  possible  combinations  for  which 
rates  had  to  be  set. 

In  working  out  this  problem  however,  it  was  found  that  the 
variations  in  the  loading  and  unloading  time  of  standard  truck- 


MACHINE  OPERATION  SUMMARY 

Periorl  Ending 

o 

Machine ' 
No. 

This  Year 

Last  Year 

Available 
Hours 

Active 
Hours 

Cost  per  Hour 

%  Active 

to  Available 

Hours 

Cost  per  Hour 

%  Active 

to  Available 

Hours 

Actual 

Average 

Actual 

Average 

1 ' 

— 1 

Form  83 

loads  were  small.  A  very  simple  table  of  rates  was  devised  to 
provide  for  the  different  distances  of  travel  and  the  few  variations 
in  handling  time. 

Practically  no  additional  effort  was  needed  to  keep  the  record 
of  this  group's  work  for  payroll  purposes  and  the  net  result  was 
a  reduction  in  the  shipping  labor  cost  of  30%.  The  number  of 
men  required  after  the  gang  was  put  on  piece  work  was  approxi- 
mately one  half  that  necessary  under  the  day  wage  plan,  and 
those  retained  in  the  crew  were  figured  to  earn  an  average  of 
22j/£  cents  an  hour  on  the  piece  basis  as  against  18  cents  before 
the  change  was  introduced — an  increase  of  25%  in  the  average 
earnings  per  man.  The  company  saved  about  $6,000  a  year  on 
its  shipping  and  receiving  alone. 

Whatever  the  task,  some  way  may  be  found  to  pay  men 
better  wages  for  better  work. 

The  Problem  of  Timekeeping.  In  large  factories  and  even 
in  some  small  factories,  the  timekeeping  problem  is  a  very  serious 
one.    Owners  should  not  forget  that  they  are  paying  the  full 


240  BUSINESS  ACCOUNTANCY 

market  rate  for  all  of  the  delays  at  the  door  when  the  men  come 
to  work,  although  the  employees  are  quite  cheerful  about 
delays  which  prevent  the  beginnings  of  a  task.  On  the  other  hand, 
they  are  most  insistent  that  nothing  shall  delay  their  precipitous 
exit  when  the  whistle  blows;  remembering  the  delay  in  getting  in, 
the  men  make  sure  that  they  will  not  be  kept  back  in  the  evening. 
The  clock  watchers — and  they  are  in  the  majority — will  quit  in 
ample  time  to  get  a  good  place  in  the  line  leaving  the  factory. 
Thus  the  owner  loses  coming  and  going;  the  daily  time  loss, 
multiplied  by  the  number  of  working  days  in  the  year,  makes  a 
neat  sum  of  money. 

Making  the  Payroll  Talk.  The  figures  which  are  derived 
from  the  labor  side  of  the  cost  system  should  preach  no  end  of 
sermons  to  the  man  who  understands  them.  The  man  who  knows 
only  the  amount  of  his  payroll  knows  nothing  of  his  business. 
I  am  glad  to  say  that  few  manufacturers  today  are  quite  so 
uninformed  as  that.  The  departmental  payroll  is  fairly  common 
but  it  also  can  be  improved  upon. 

Here  is  a  hint  as  to  possibilities.  Start  with  a  departmental 
summary  in  this  form: 

Workers 
20 
3d 
30 

138 
56 

280 


This  arrangement  fails  to  tell  where  a  man  is  working. 
Employees  transfer  from  department  to  department  and  a  form 
of  this  sort  makes  it  simply  a  matter  of  judgment  on  the  part  of 
the  payroll  clerk  as  to  where  the  man  should  be  counted  as 
working.  To  overcome  this  and  to  give  the  information  sought 
for,  a  payroll  summary  has  been  devised  along  these  lines: 

Total  Direct  Indirect  Average 


Department 

Amount  paid 

A 

$   251.25 

B 

701.02 

C 

387.29 

D 

1,521.14 

E 

527.82 

Total 

$3,388.52 

Average  wages  $12.10 

Department 

pay 

labor 

labor 

Hours 

rate 

A 

$    251.25 

$   200.79 

$  50.46 

1,005.0 

$0.25 

B 

701.02 

690.12 

10.90 

2,002.9 

.35 

C 

387.29 

362.41 

24.88 

1,683.8 

.23 

D 

1,521.14 

1,318.77 

202.37 

7,605.7 

.20 

E 

527.82 

527.82 

3,104.8 

.17 

Total  $3,388.52  $3,099.91  $288.61        15,402.2         $0.24 


ACCURATE  LABOR  COST  241 

This  method  gives  an  easy  chance  to  curb  the  foreman  who  is 
always  kicking  about  the  difficulty  in  getting  men.  A  comparison 
with  other  departments  would  show  the  fallacy  of  his  argument 
(see  department  B). 

It  is  simple  enough,  after  setting  up  the  payroll  summary, 
to  give  it  an  actual  living  meaning  by  adopting  it  as  a  control  of 
the  labor  costs  in  connection  with  production. 

The  cost  department  receives  production  reports  from  the 
various  departments,  but  commonly  uses  them  only  to  determine 
monthly  output  figures.  By  gathering  the  figures  from  these 
reports  each  week,  one  may  set  up  a  weekly  production  record 
like  this: 


Department 

Quantity 

Unit 

A 

20,000 

lbs. 

B 

10,000 

lbs. 

C 

13,750 

yards 

D 

2,050 

dozen 

E 

2,225 

dozen 

If  the  payroll  summary  is  then  compared  with  the  production 
report,  the  labor  cost  per  unit  in  each  department  will  be  had. 
Comparing  each  week  with  the  preceding  week  will  immediately 
locate  any  tendency  in  the  labor  cost  per  unit  to  depart  from  the 
normal. 

The  above  method  is  possible  only  where  a  unit  can  be 
provided,  as  in  textiles  or  some  metal-working  factories  with  a 
single  product.  If  no  unit  of  output  can  be  arranged,  then  the 
efficiency  percentages  of  the  labor  may  instead  be  used.  Space 
for  such  ratings  is  to  be  found  on  Forms  36,  37,  38,  and  39. 
The  standard  times  are  found  through  time  study. 

Cost  study  of  labor  leads  to  efficiency  investigation.  Once 
you  know  the  amount  of  money  you  are  losing  through  bad 
methods,  the  further  investigation  follows  as  a  matter  of  course. 


CHAPTER  XVIII 


HOW  TO  DETERMINE  THE  OVERHEAD  EXPENSE 

THREE  elements  enter  into  the  cost  of  a  finished  article 
material,  labor,  and  expense.  In  making  up  the  cost  of 
our  finished  product  we  have  already  the  entries  upon  the 
final  cost  sheet  for  material  and  labor.  But  material  and  labor 
are  not  the  sole  elements  of  manufacturing;  one  must  have  a 
place  to  work,  tools  with  which  to  work,  and  various  supplies. 

None  of  these  expenses  are  for  the  benefit  of  one  particular 
article  or  job  as  distinguished  from  its  fellows,  but  certainly 
they  are  a  part  of  the  cost  of  domg  business  and  must  somehow 
be  gotten  into  the  final  cost  of  the  finished  article.  They  seem 
to  come  from  above — to  bear  down  on  the  labor  and  material 
and  hence  they  are  called  "overhead"  charges  or,  simply 
"expense."    The  English  term  is  "burden." 

The  distribution  of  the  overhead  expense  is  where  most  cost 
systems  fall  down.  The  very  name  "overhead"  denotes  the 
dread  with  which  this  inclusive  item  is  viewed  by  so  many 
manufacturers. 

No  fixed,  general  rules  can  be  laid  down  for  expense  distribu- 
tion, but  from  the  plans  herein  suggested,  some  ideas  to  fit  your 
own  case  can  be  had,  although  this  chapter  is  to  be  considered 
only  as  an  introduction  to  manufacturing  expense,  a  stimulation 
to  further  investigation. 

The  end  of  all  calculation  of  manufacturing  expense  is  to 
get  the  costs  into  the  goods  themselves,  and  therefore,  instead  of 
considering  overhead  merely  as  an  unavoidable  burden,  the 
thought  should  be  to  devise  new  ways  to  lessen  overhead  and 
to  put  the  costs  directly  into  the  product.  They  will,  of  course, 
come  into  the  product  in  any  event,  and  it  is  always  more  accurate 
to  charge  directly  than  by  percentages. 

Overhead  arises  from  a  great  many  different  sources.  Some 
of  the  charges  are  fairly  fixed  while  others  fluctuate.  Therefore 
each  source  must  be  kept  separate,  so  that  its  operation  may  be 

242 


OVERHEAD  EXPENSE  243 

studied,  and  then  finally  all  of  the  sources  connected  with  the 
goods  themselves;  for,  to  be  useful,  costs  must  eventually  be 
brought  down  to  the  selling  unit.  If  one  knows  the  cost  of  the 
selling  unit,  then  the  selling  price  of  that  unit  may  be  intelli- 
gently fixed.  If,  however,  as  is  often  the  case,  the  sales  price 
cannot  be  based  upon  the  cost,  but  is  regulated  solely  by  com- 
petition, then  the  unit  costs  will  give  a  start  for  the  business 
man  to  go  back  and  discover  if  somewhere  along  the  fine  he  is 
not  making  a  useless  expenditure,  or  whether  it  will  not  be 
profitable  to  revise  his  fines. 

One  great  purpose  of  modern  cost  systems  is  to  bring  charges 
directly  against  the  products — to  put  the  material  and  labor 
against  the  specific  article — and  to  avoid  treating  expense  as 
a  necessarily  inclusive  head. 

The  indirect  or  ''overhead"  expenses  are  all  of  the  expenses 
of  doing  business  other  than  those  included  in  productive  labor 
and  material.  Among  them  are  rent,  heat  and  light,  adminis- 
tration, selling,  advertising — in  short  all  those  expenses  which 
cannot  specifically  be  pointed  out  as  such  in  the  finished  article. 
For  instance  you  cannot  translate  minutes  of  power  applied  into 
ounces  of  coal,  and  even  if  you  could,  the  calculation  would  not 
be  sufficient  in  itself  unless  you  also  discovered  the  amount 
of  lubricating  oil  consumed  in  transmitting  that  minute  of 
power,  the  wear  and  tear  in  each  stage  of  creation  and  trans- 
mission, and  so  on  into  an  infinite  number  of  details.  Perhaps 
such  calculations  might  be  possible,  but  certainly  they  are  not 
practicable,  and  the  result  would  be  a  plant  devoted  more  to 
the  calculations  of  expense  than  to  the  making  of  money. 

Instead  of  endeavoring  to  go  into  such  refinements,  we 
locate  the  controlling  section;  we  find  out  how  much  power  that 
section  uses,  the  proportions  which  the  various  machines  use, 
and  then  work  down  to  an  approximately  accurate  cost  unit 
to  which  are  charged  not  only  the  power  used,  but  also  the  other 
matters  of  general  expense  which  it  absorbs. 

The  idea  is  to  put  all  of  the  expense  on  the  specific  finished 
article  so  that  its  exact  cost  may  be  known,  but  at  the  same 
time  to  divide  that  expense  among  the  departments  of  the 
business  in  order  that  the  working  and  efficiency  of  any  one 
department  may  be  expressed  in  figures  fit  for  comparisons. 

The  Divisions  of  Expense.  The  possible  expenses  can  be 
broadly  grouped  under  three  heads : 


244  BUSINESS  ACCOUNTANCY 

1.  The  fixed  charges — that  is,  the  charges  which  spread 
over  the  entire  establishment,  such  as  rent,  insurance,  taxes, 
mortgage  interest,  depreciation,  and  the  like,  according  to 
whether  the  plant  is  leased  or  owned.  The  amount  of  these 
expenses  seldom  varies  with  the  volume  of  business. 

2.  The  contributory  department  charges,  the  expense  of 
which  will  vary  with  the  volume  of  the  business  and  which  operate 
for  the  benefit  of  the  factory  as  a  whole.  Among  these  are  the 
office  expenses,  executive  salaries,  general  superintendence,  heat, 
light,  and  power,  the  upkeep  of  the  stock  room,  the  receiving 
room,  and  the  shipping  room. 

3.  The  productive  department  charges  which  arise  in  the 
sections  of  the  factory  which  are  actually  working  upon  the  goods 
but  which  are  of  such  a  character  that  they  cannot  be  charged 
directly  into  a  particular  item  of  product,  as  supplies,  trucking, 
indirect  labor,  and  departmental  supervision. 

We  must  gather  these  various  charges  at  their  several  sources 
and  then  find  some  method  of  getting  them  into  the  cost  of  the 
goods  themselves. 

The  Fixed  Charges.  These  arise  out  of  the  very  being  of 
the  plant  and  continue  whether  or  not  the  business  is  operating. 
They  are  such  charges  as  rent  (or  in  the  case  of  ownership  of  the 
building,  taxes,  mortgage,  interest,  and  so  on),  insurance,  and 
depreciation  of  both  plant  and  equipment  through  use  and 
obsolescence. 

Should  one  also  include  interest  on  the  investment?  It  is 
by  some  contended  that  this  interest  should  be  added  because 
capital  has  been  tied  up,  and  capital  always  must  have  its  reward. 
I  am  against  any  such  inclusion.  One  does  not  enter  a  man- 
ufacturing or  jobbing  business  to  make  a  banker's  interest;  if 
only  4  or  5%  be  wanted,  why  risk  capital  in  commerce  when  it 
might  be  invested  without  speculative  danger  in  government 
bonds? 

One  enters  business  to  make  a  greater  profit  than  is  possible 
through  banking,  and  therefore,  why  not  view  the  profit  on  the 
investment  as  a  whole,  instead  of  first  making  a  deduction  of 
a  banker's  profit  and  then  counting  the  increment  above  that 
profit  as  manufacturing  profit? 

The  practice  is  illogical  from  all  points  and  it  may  be 
positively  bad.    Thrusting  a  figure  which  is  not  cost  into  the 


OVERHEAD  EXPENSE  245 

cost  of  the  product  obscures  in  the  final  figures  that  which  is 
profit  and  that  which  is  cost.  Only  profit  should  be  considered, 
the  profit  on  the  salea  and  not  the  profit  on  the  money.  Charging 
interest  on  the  investment  can  be  a  serious  handicap. 

I  recall  one  company  which  operated  in  an  ill-adapted  factory; 
it  had  too  much  idle  space  in  the  building,  and  too  much  idle 
land  about  the  plant.  In  addition,  part  of  the  equipment  had 
become  obsolete  and  was  used  only  on  special  orders  for  dis- 
carded lines.  The  management  charged  interest  on  the  total 
investment  and  weighted  the  finished  goods  with  a  cost  of  much 
which  did  not  in  any  way  contribute  to  manufacture.  Thus 
they  penalized  their  production.  It  is  easily  conceivable  that 
the  interest  on  unused  capital  expenditures  might  be  the  largest 
single  item  in  the  cost  of  the  finished  product,  and  possibly  raise 
its  cost  to  such  a  point  that  it  would  be  unsalable. 

Another  bad  feature  is  that  it  is  generally  difficult  and  some- 
times impossible  to  determine  accurately  the  amount  of  capital 
which  has  gone  into  a  company  which  has  been  operating  for  a 
number  of  years.  The  new  investments  are  likely  to  have 
become  confused  with  the  renewals  and  replacements.  Thus 
we  cannot  tell  whether  the  figure  which  we  call  investment  is 
more  than  an  approximation  of  the  actual  investment.  That  is  a 
practical  difficulty  in  addition  to  the  violation  of  the  sound 
principle  that  today's  management  should  not  be  burdened  with 
the  expense  of  the  past. 

But  some  manufacturers  say: 

"I  want  to  get  the  interest  on  my  investment  into  the  goods 
themselves,  and  then  I  shall  know  that,  even  if  I  sell  at  apparent 
cost,  I  am  still  getting  a  return  on  my  money." 

This  is  equivalent  to  putting  one's  money  into  several  pockets 
as  a  safeguard  against  spending  too  much  in  any  one  place, 
and  it  is  not  business.  Let  the  cost  figure  be  actual  cost,  then 
regulate  the  selling  price  accordingly. 

Departmental  Basis  for  Costs.  The  fixed  charges  are 
paid  in  bulk — taxes  once  a  year,  mortgage  interest  generally 
twice  a  year,  and  so  on.  They  are  paid  upon  the  property  as  a 
whole.  The  depreciation  of  plant  and  equipment  goes  on  always 
and  is  a  bookkeeping  charge  reduced  to  an  annual  basis.  In 
Chapter  XIII  we  took  up  the  methods  for  arriving  at  depreciation 
and  of  accounting  for  the  value  of  the  equipment.  Let  us  assume 
therefore  that  we  either  have  books  which  give  us  the  present 


246  BUSINESS  ACCOUNTANCY 

worth  of  the  plant  and  equipment  or  have  made  a  fresh,  detailed 
appraisement.  The  maps  and  diagrams  show  our  factory  and 
the  positions  of  all  equipment. 

Next  we  divide  the  plant  into  "departments."  For  cost 
purposes,  departments  are  not  enclosures  surrounded  by  four 
walls.  A  dozen  departments  may  be  on  the  one  floor.  Their 
proper  division  is  one  of  the  most  important  fundamentals  of 
cost  finding  according  to  the  best  practice. 

A  department  may  be  large  or  small  and  it  is  determined  by 
the  rule:  Group  machines  of  like  values  and  operation  costs 
for  power  and  labor  or  find  labor  divisions  in  which  the  wages 
of  all  the  workers  are  approximately  on  the  same  scale. 

Thus  a  department  may  be  large  or  small;  it  may  take  in  a 
whole  building  or  a  single  expensive  machine;  but,  in  any  event, 
the  divisions  do  not  necessarily  correspond  with  the  common 
factory  divisions  such  as  foundry,  machine  shop,  and  assembling 
room.  The  ideal  department  has  machines,  each  of  the  same 
value  and  operating  cost,  and  all  the  employees  therein  receive 
wages  on  identical  rates. 

Such  departmental  divisions  sound  intricate  and  in  some 
cases  may  be  quite  complex;  but,  for  reasons  which  will  more 
fully  appear  later  in  this  chapter,  the  scientific  grouping  of  units 
is  commonly  the  best  starting  point  in  a  distribution  of  overhead 
expense.  Other  methods  obtain  and,  according  to  the  state  of 
facts,  they  may  be  accurate.  But,  in  any  event,  we  must  divide 
the  factory  into  departments  of  some  kind  and  on  some  basis 
which  may  or  may  not  have  anything  to  do  with  physical  layout. 

The  Departmental  Cost  Sheet.  Form  84  shows  a  depart- 
mental cost  sheet.  On  it  are  listed  the  departments  and  also 
the  various  items  of  fixed  expense.  It  is  almost  self-explanatory. 
If  the  buildings  have  radical  differences  in  construction  or  in 
cost  of  construction,  so  that  some  gather  more  overhead  than 
others,  then  special  sheets  are  set  up  for  such  buildings;  otherwise 
the  fixed  charges  are  distributed  according  to  the  floor  space 
occupied  by  the  department. 

In  calculating  the  percentages,  the  building  tax,  insurance 
and  depreciation  are  taken  from  the  figures  of  the  previous  year, 
because  these  items  seldom  change.  If,  however,  the  insurance 
or  tax  rate  does  change  during  the  year,  the  adjustment  is  made 
at  once  and  the  addition  distributed  through  the  remaining 
months  of  the  year.    The  amount,  when  so  subdivided,  is  small, 


OVERHEAD  EXPENSE 


247 


and  though  it  is  not  entirely  accurate  to  distribute  an  increase 
over  6  months  which  belongs  to  12  months,  the  difference  in  the 
net  result  eventually  obtained  is  so  slight  that  it  may  be  dis- 
regarded. In  many  accounting  problems  the  question  arises  as  to 
whether  or  not  the  attainment  of  absolute  accuracy  is  not,  in 
itself,  more  expensive  than  a  slight  error.  A  too  avid  pursuit 
oi  niceties  and  trivialities  has  wrecked  many  a  cost  system. 


o 

DISTRIBUTION  OF  FIXED  CHARGES 

Departments 

Items  Divided  on  Basis  of  Floor  Space  Occupied 

Items  Divided  on  Basis  of  Investment 

Figures  Used  In 
Expense  Analyses 

Feel 

Floor 

Space 

Occupied 

%to 
Total 

Building 
Taxes 

Building 
Insur- 
ance 

Building 
Deore 
elation 

Total 

Value 
Machin- 

•fy 

7,  to 
Total 
Value 

Mechin. 
ery 
Insur- 
ance 

Machine 
Depre- 
dation 

Total 

Grand 

Total 

per  Year 

s     ' 

0 

— — 

Fori 

ii  84 

The  total  of  each  of  the  elements  distributed  through  the 
departments  is  translated  into  percentages,  and  we  have  for  each 
department  the  share  which  it  must  bear  of  the  charges  on 
capital  investment  other  than  equipment  or  machinery. 

The  machine  values  and  depreciation  figures  are  obtained 
from  the  plant  register,  or  appraised,  and  may  be  grouped  in 
subsidiary  records  and  carried  to  the  department  6heet. 

We  have  now  the  total  annual  sums  which  each  department 
must  bear  for  fixed  charges,  including  building  depreciation  and 
also  the  annual  machine  depreciations  and  insurance.  Divide 
the  annual  total  by  12  and  the  result  is  the  monthly  burden  for 
the  department — the  share  of  what  is  inclusively  known  as 
fixed  factory  charge.  This  is  the  share  of  expense  which  the 
department  must  bear  regardless  of  whether  or  not  it  operated 
— it  is  a  kind  of  license  fee  for  existence. 

If  the  machinery  be  large  and  expensive,  as  in  a  paper  mill, 
the  charges  may  be  collected  directly  on  the  machines  (Form  85.) 

The  most  convenient  calendar  division  or  period  for  ascer- 
taining costs  is  the  month.  But  if  the  payroll  comes  every 
week,  the  monthly  division  of  costs  will  not  correspond  with  the 
wage  payments  without  laborious  adjustment.     To  overcome 


248 


BUSINESS  ACCOUNTANCY 


this,  every  third  month  is  given  an  extra  week — that  is,  the  year 
is  divided  into  four  quarters  of  13  weeks  each,  so  that  the  cost 
divisions  will  meet  the  fiscal  divisions.  Another  method  is  to 
pay  four  times  a  month — on  the  eighth  day,  the  fifteenth,  the 
twenty-third,  and  the  last  day;  a  more  preferable  way  is  to  pay 
on  the  fifteenth  and  the  last  day  of  the  month.  The  best  plan 
of  all  is  to  have  a  monthly  pay  day — it  saves  much  clerical  labor 
and  requires  no  artificial  divisions — but  what  with  laws  and 
customs,  the  ideal  method  cannot  often  be  followed. 


DIVISION  OF  EQUIPMENT  INSURANCE  AND  DEPRECIATION 
WITHIN  DEPARTMENTS 

Department 

Machines  (Owned) 

Machine 

No. 

Machine 
Value 

%to 
Total 

Yearly  Charge  to 
Each  Machine 

Charge  per 
2  Weeks 

_1^_^ 

Department  Total 

ZZ3 

| 

_--  — 

=- -— ~ — 

«. >- 

h= — 

Form  85  1 

Collecting  Contributory  and  Production  Expense.  The 
expenses  in  the  contributory  and  productive  departments  are 
collected  on  sheets  in  such  a  manner  that  the  very  gathering  of 
the  facts  attracts  attention  to  possible  economies. 

The  means  is  the  expense  analysis  (Forms  86  to  90  inclusive), 
which  was,  I  believe,  devised  in  its  original  form  by  Mr.  Benjamin 
A.  Franklin,  a  former  member  of  my  company.  Each  depart- 
ment takes  a  separate  sheet.  Four  columns  are  provided  for 
each  month  in  order  to  present  comparisons  between  the  current 
month  and  period  and  the  same  month  and  period  of  the  previous 
year.  The  sheets  are  bound  in  a  looseleaf  book.  Slip  sheets 
permit  a  continuation  of  the  posting  without  new  master  entries. 

I  know  of  no  records  in  cost  accounting  which  are  of  such 
extraordinary  value  as  the  expense  analysis.  They  form  a 
month  to  month  guide  for  the  executive  of  exactly  what  is  going 


OVERHEAD  EXPENSE  249 

on  within  his  plant.  Some  executives  use  them  as  a  theologian 
uses  a  Bible.  I  know  of  one  man  who  carries  the  records  home 
at  the  end  of  every  month,  and  returns  from  their  perusal  loaded 
with  ideas  for  betterment.  It  is  seldom  a  month  passes  in  which 
he  does  not  find  where  he  can  make  an  improvement.  It  is 
impossible  for  wastes  long  to  continue  in  any  concern  which 
conscientiously  keeps  and  uses  an  analysis  of  expense. 

A  separate  sheet  should  be  provided  for  each  department,  or 
if  very  exact  comparisons  are  needed,  for  divisions  of  a  depart- 
ment— the  whole  idea  being  to  get  at  the  details  of  expense. 
Cost  accounting  will  not  be  of  any  material  benefit  unless  the 
various  items  of  cost  may  be  run  to  earth,  and  it  is  this  which  is 
possible  through  the  expense  analysis.  Its  compilation  does 
not  mean  extra  clerical  work,  but,  on  the  contrary,  gives  most 
valuable  information  as  an  incident  to  cost  finding. 

Making  Up  the  Expense  Analysis.  The  first  entries  on 
the  analysis  are  of  the  items  of  direct  or  controllable  expense — 
expenses  which  depend  upon  the  amount  of  business  done. 
To  the  total  of  these  is  added  the  uncontrollable  expense,  that  is, 
the  share  of  fixed  charges,  of  administrative  costs,  or  whatever 
divisions  may  be  selected.  Sometimes  taxes,  insurance,  and  so 
forth,  are  carried  to  the  sheet  in  detail,  or  again  they  are  brought 
over  in  summary  from  the  subsidiary  fixed  charge  sheets.  The 
procedure  is  entirely  a  matter  of  personal  preference  provided 
that  all  of  the  charges  which  belong  to  the  department  get  there. 

If  the  sheet  covers  a  production  department  the  final  total 
cost  is  divided  by  the  units  produced  in  that  department,  or  by 
the  operating  hours,  or  by  some  other  divisor  which  indicates 
the  extent  of  the  operations,  so  that  we  may  have  an  operating 
cost  per  unit  or  per  hour  in  the  department.  Thus  we  have  in 
each  month  a  unit  figure  for  comparison.  If  that  figure  is  normal 
it  is  not  necessary  to  go  back  into  the  details,  but  if  it  be  abnormal 
then  not  only  is  study  promoted,  but  the  facts  are  at  hand. 

The  time-saving  feature  of  the  reduction  to  operating  cost 
per  unit  is  notable.  The  executive,  if  he  does  not  care  to  examine 
the  entire  collection  of  sheets  contained  in  the  expense  analysis, 
may  have  taken  off  for  himself  a  table  of  unit  operating  costs, 
and  thus  at  a  glance  can  decide  if  any  department  needs  attention. 

Expenses  grow  insidiously.  If  one  has  monthly  expenses 
only  in  gross  and  without  percentages  for  comparison,  a  large 
number  of  items  will  pass  by  unnoticed. 


Share  of  Taxes 


Share  of  Insurance 


Share  of  Depreciation 


TOTAL  INDIRECT  OFFICE  EXPEHSB 


TOTAL  OFFICE  EXPEHSB 


(carried  to  manufacturing  oTerhead) 


FORMS  86-90:  Expense 
analysis  sheets  such  as 
shown  on  this  page  are  of 
great  value  in  calling  at- 
tention to  possible  econ- 
omies. They  form  a  month 
to  month  guide  of  what  is 
going  on  within  the  plant. 
It  is  impossible  for  wastes 
to  continue  when  they 
are  conscientiously  used. 


250 


OVERHEAD  EXPENSE  251 

Analysis  of  Power  Expense.  Take  the  specific  application 
of  the  expense  analysis  to  one  of  the  most  troublesome  of  the 
contributory  departments — the  power  house.  Not  a  few  execu- 
tives are  in  such  despair  over  the  vagaries  of  the  power  plant  that 
they  have  come  to  regard  it  hopelessly  insofar  as  regulation  is 
concerned.  But  a  very  close  check  may  be  had  through  the 
analysis.    Here  is  the  procedure: 

First  we  list  on  the  expense  analysis  the  elements  of  expense: 


coal 

coal  handling 

inward  freight 

oils 

waste 

repairs 

replacements 

engineers 

firemen,  and  so  on 

The  sum  of  these  gives  the  total  controllable  expense.  I 
use  the  word  "controllable"  to  distinguish  these  expenditures 
from  those  which  are  put  on  a  department  through  no  action  of 
its  own,  as: 

Share  of  fixed  charges  Share  of  general  factory 

Share  of  administrative       Share  of  office,  and  so  on 

They  are  entered  on  the  sheet  immediately  following  the 
total  of  the  controllable  expense.  The  sum  of  the  controllable 
expense  and  the  share  of  uncontrollable  expense  gives  the  total 
power  expense.  This  is  divided  by  the  power  developed  to  find 
the  cost  per  horse-power.  It  does  not  convey  much  to  say  that 
the  power  department  cost  so  much  this  month  and  so  much  that 
month,  because  the  variable  volume  of  the  work  may  make  any 
increase  in  expense  entirely  legitimate — we  must  generate 
additional  power  to  meet  the  demands  of  larger  business.  But 
when  you  have  a  "per  horse-power "  figure,  comparable  with 
previous  figures,  any  unnecessary  expense  will  instantly  become 
prominent.  If  the  horse-power  rate  is  high  and  your  coal  con- 
sumption is  also  abnormal,  the  cause  may  be  bad  stoking,  poor 
coal,  or  any  one  of  a  number  of  other  things.  Immediately  you 
investigate  to  find  the  real  cause. 

There  are  few  concerns  having  the  benefit  of  this  close  analysis 
which  do  not  now  buy  their  coal  on  the  basis  of  thermal  units 
instead  of  on  the  old  ton  plan.  One  coal  may  cost  twice  as  much, 
bulk  for  bulk,  as  another,  but  under  certain  conditions  it  may 
really  be  much  cheaper  because  it  gives  more  heat  and  involves 
less  handling  both  of  coal  and  ashes. 


252  BUSINESS  ACCOUNTANCY 

The  total  power  is  distributed  on  a  percentage  basis  to  the 
various  departments.  Where  electrical  transmission  is  used,  the 
amount  consumed  can  be  measured  accurately  by  meter.  Steam 
is  harder  to  measure  and  we  cannot  do  much  better  than  a  fairly 
accurate  estimate  when  the  steam  is  translated  into  power  and 
transmitted  through  belts  and  shafting.  Steam  that  is  taken  for 
drying  or  heating  can,  of  course,  be  easily  measured. 

The  steam  power  apportionment  is  conveniently,  but  not 
accurately,  found  by  calculating  the  friction  loads  of  the  machines 
in  each  cost  department  and  then  testing  the  result  at  the  noon 
hour  or  some  other  time  when  the  factory  is  idle,  by  running  only 
that  department  and  observing  the  power  consumption  indicator 
at  the  engine.  This  is  an  arbitrary  division,  for  the  power 
absorbed  on  the  cutting  or  working  load  is  much  greater.  The 
actual  power  consumed  under  load  conditions  can  be  found,  if 
desired,  by  running  departments  alone,  as  before,  but  at  cutting 
instead  of  friction  load. 

The  intent  of  this  procedure  is  to  carry  the  power  expense 
directly  to  a  department  on  the  basis  of  actual  consumption  and 
thus  to  dodge  the  objectionable  percentage  distribution. 

Form  91,  shown  on  Insert  XI,  will  be  found  helpful  in 
ascertaining  the  efficiency  of  your  power  generation.  It  is  the 
summarization  of  the  power  return  in  a  large  number  of  factories 
under  the  conditions  noted;  the  calculations  can  be  used  as 
standards  against  which  to  compare  your  own  performance — in 
exactly  the  same  method  as  was  used  in  comparing  the  actual 
labor  with  the  standard  in  a  former  chapter. 

Expense  Divisions.  In  the  lower  form  on  page  250  is  an 
analysis  of  office  expense  to  which  has  been  added  a  valuable 
column — "monthly  appropriation."  In  concerns  which  plan  a 
budget  for  the  year  (a  budget  should  be  prepared  whenever 
practicable)  it  is  essential  to  know  each  month  how  the  amount 
planned  to  be  spent  compared  with  the  amount  actually  spent. 

It  would  not  be  worth  while  for  me  to  go  through  all  of  the 
various  business  divisions  and  show  for  each  of  them  an  expense 
analysis.  The  subdivisions  are  natural,  and  the  itemization  may 
be  carried  forward  to  any  desired  degree.  Here  again  the  rule 
is  common  sense.  There  are  no  arbitrary  divisions,  and  it  is 
very  seldom  that  the  factory  head  cannot  determine  for  himself 
the  most  desirable  divisions  to  suit  a  particular  case.  But,  if 
you  are  in  doubt,  divide  rather  than  consolidate. 


INSERT  XI 

FORM  91,  described  on  page  252 


Showing  the  Comparative  Cost  c 

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T 


OVERHEAD  EXPENSE  253 

For  instance,  the  receiving  room  and  the  stock  room  should 
be  carried  separately,  and  the  total  taken  over  to  the  general 
factory  expense  sheet.  The  shipping  and  packing  room  is  carried 
as  a  unit,  and  I  prefer  to  take  this  total  to  selling  expense, 
although  sometimes  it  is  carried  into  general  factory  expense. 
The  expense  of  the  packing  depends  upon  the  district  in  which 
the  goods  are  being  delivered,  and  the  selection  of  this  district 
is  with  the  sales  force  and  not  with  the  factory.  The  salaries 
of  the  personal  secretary  or  clerks  of  the  executives  go  to  the 
same  charge  as  the  salaries  of  the  executives  themselves.  These 
clerks  are  the  tools  of  the  administrators  and  as  such  the  cost 
of  their  services  should  rightfully  be  borne  by  the  same  sources. 

The  Separation  of  Expense.  The  portion  of  the  adminis- 
trative expense  devoted  to  production  goes  to  administrative  and 
general  factory  expense.  That  which  concerns  itself  with  the 
sale  of  the  product  naturally  goes  into  the  selling  expense.  The 
non-productive  labor,  if  it  works  within  a  department,  is  charged 
to  that  department,  but  otherwise  becomes  part  of  the  general 
factory  expense. 

In  the  productive  department  we  should  have  the  divisions 
of  foremen,  non-productive  labor,  idle  hours,  supplies,  repairs 
to  dies,  repairs  to  machinery,  and  so  on  as  the  situation  requires. 
Each  month  the  amount  to  each  item  would  be  placed  on  the 
expense  analysis  beside  the  amount  of  the  previous  month,  and 
a  glance  would  show  if  any  of  these  were  large  or  out  of 
proportion. 

The  number  of  economies  which  may  be  effected  by  these 
comparisons  is  astounding.  I  found  in  the  plating  room  of  one 
plant  that  about  $75  a  month  was  being  spent  for  rubber  gloves. 
These  gloves  cost  $2  or  $3  a  pair,  and  were  being  used  by  the 
workers  in  the  acid  tanks.  The  slightest  pinhole  made  them 
valueless.  The  installation  of  a  cheap  vulcanizer  permitted  the 
torn  gloves  to  be  repaired  and  $600  a  year  was  saved  on  this 
apparently  trivial  item.  In  another  plant  lubricating  oil  was 
used  in  enormous  quantities,  and  no  effort  had  been  made  for 
its  reclamation.    A  $75  extractor  here  saved  over  $2,000  a  year. 

In  a  shipping  room  the  business  had  dropped  down  prac- 
tically one  half,  but  until  the  expense  analysis  came  through 
the  executives  had  not  realized  that  they  were  continuing  the 
old  labor  quota  in  full.  On  investigation  it  turned  up  that  eight 
of  the  men  had  nothing  to  do. 


254  BUSINESS  ACCOUNTANCY 

The  thought  behind  the  expense  analysis  is  the  obtaining  of 
the  correct  relations  of  expenses.  Have  the  items  tabulated  for 
comparisons  by  months,  and  then  arrange  them  in  percentage 
form,  so  that  production  and  expenses  will  be  related.  The 
increase  in  expense  will  be  fully  intelligible  only  when  placed  on 
a  percentage  basis,  so  that  it  may  be  ascertained  whether  the 
expense  is  large  because  of  bad  management  or  whether  it  is 
legitimately  large  owning  to  increased  production. 

Apportioning  the  Expense.  Thus  far  the  gathering  of 
expense  has  been  a  mere  tabulation  except  that  it  has  been 
indicated  that  certain  departments  called  "contributory"  exist 
to  aid  other  departments  called  "productive."  In  the  case  of 
the  power  plant,  we  have  already  given  a  method  for  distribut- 
ing its  cost  to  the  departments  which  actually  consume  the  power. 
It  is  plain  that  the  department  using  power  should  be  charged 
with  its  cost.  The  division  is  logical,  and  thus  the  charges  for 
power  have  all  been  absorbed  by  division  into  other  departments 
and  the  expense  analysis  of  the  power  plant  becomes  a  record 
subsidiary  to  the  records  of  the  production  departments. 

The  fixed  charges  have  also  been  distributed  among  the  vari- 
ous departments,  contributory  and  productive,  on  the  ratio  of 
the  square  feet  occupied  by  each  department.  The  items  of 
fixed  charge  have  therefore  been  all  accounted  for  and  so  pass 
out  of  our  present  reckoning. 

We  now  have  a  set  of  expense  analysis  sheets  which  have  on 
them  all  expenses  directly  incurred  by  the  departments  and 
also  the  proper  shares  of  fixed  charges.  The  sum  of  all  the 
charges  contained  on  these  sheets  would  be  the  total  overhead 
expense  of  the  plant. 

But  of  the  departments  thus  listed,  some  are  contributory 
and  some  are  productive.  We  are  on  our  way  eventually  to 
get  the  charges  into  the  goods  which  we  manufacture;  the  con- 
tributory departments  do  not  manufacture,  therefore  their 
charges  must  somehow  be  merged  into  the  productive  depart- 
ments unless  the  charges  do  not  concern  production.  Some  were 
incurred  by  the  sales  force  in  marketing  the  product. 

We  therefore  open  two  new  accounts  which  have  been  men- 
tioned but  not  described — "administration  and  general  factory 
expense"  and  "selling  expense."  (Either  account  may  be  carried 
as  noted  or  in  two  or  more  divisions.)  The  expenses  of  the  several 
contributory  departments  are  carried  to  one  or  the  other  of 


OVERHEAD  EXPENSE  255 

these  accounts  according  to  whether  the  expense  is  incident  to 
manufacturing  or  to  selling.  " Selling  expense"  will  be  treated 
in  the  next  chapter. 

The  next  problem  is  to  distribute  the  total  of  the  "adminis- 
trative and  general  factory  expense"  to  the  productive 
departments. 

We  have  had  little  opportunity  so  far  to  get  into  trouble 
with  costs,  as  they  have  been  directly  credited  and  charged  at 
their  points  of  origin,  and  the  only  distributions — fixed  charges 
and  power — have  been  logical.  Up  to  this  point  almost  any 
factory  or  any  kind  of  business  may  follow  similar  procedures — 
in  fact  the  foregoing  accounting  is  common  to  practically  all 
cost  systems  of  merit.  It  is  in  the  distribution  that  business 
peculiarities  begin  to  show  themselves,  and  from  this  point  for- 
ward nearly  every  business  stands  on  its  own  feet  and  takes 
that  which  is  best  fitted  to  its  needs. 

One  might  imagine  that  the  overhead  could  be  distributed 
almost  without  a  second  thought.  If  the  expense  amounts  to 
$100,000  and  the  total  number  of  various  different  kinds  of 
articles  produced  is  100,000,  then  is  it  not  proper  to  charge  $1 
of  overhead  to  each  article? 

Undoubtedly  this  would  dispose  of  the  whole  overhead 
expense,  but  it  would  not  give  costs;  for  it  would  not  go  back 
into  the  process  of  manufacturing  to  determine  exactly  how  much 
overhead  was  consumed  in  each  department  and  in  each  opera- 
tion which  contributed  to  the  finished  article.  As  has  been  said 
many  times  before  in  this  volume,  accounting  is  useful  only  for 
the  purpose  of  analysis.  Lump  sums  and  single  figures  give  little 
help,  for  seldom,  if  ever,  do  they  tell  where,  how,  or  why  an 
economy  may  be  effected. 

False  Methods  of  Distribution.  If,  in  the  case  just  cited, 
only  one  variety  of  article  were  produced,  and  that  by  means 
of  a  series  of  invariable  operations,  then  the  above  distribution 
would  be  entirely  accurate.  We  should  have  already  on  the 
departmental  expense  analysis,  the  controllable  expenses;  the 
department  is  not  responsible  for  the  uncontrollable  expense, 
and  it  serves  no  good  purpose  to  distribute  it  to  a  department 
if  the  uniform  character  of  the  product  is  such  that  it  can  take 
it  directly  by  division.  In  fact  the  method  is  ideal,  but  seldom 
possible.  Few  concerns  produce  only  a  single  article  and  always 
by  the  same  series  of  operations.     If  the  same  percentage  of 


236  BUSINESS  ACCOUNTANCY 

expense  is  added  to  each  unit  of  production  regardless  of  its 
manufacturing  career,  then  undoubtedly  too  much  would  be 
charged  to  some  and  too  little  to  others. 

Unless  the  sales  prices  were  so  far  above  cost  prices  that  the 
profit  could  be  had  anyhow,  undoubtedly  the  articles,  to  which 
sufficient  overhead  had  not  been  charged,  would  be  sold  at  only 
a  slight  profit  or  even  at  a  loss,  while  those  which  had  been 
given  too  much  overhead  would  be  priced  so  high  that  possibly 
they  would  scarcely  be  sold  at  all.  In  such  a  circumstance  the 
concern  would  undoubtedly  lose  money  on  the  year's  operations; 
they  would  not  charge  enough  for  part  of  their  product  and  too 
much  for  the  remainder.  One  of  the  articles,  selling  at  a  price 
based  on  the  cost  of  $3,  would  actually  be  costing  $4,  while  others 
on  a  cost  basis  of  $3  would  be  really  costing  but  $2.  Such  a  cost 
system  would  be  worse  than  useless. 

The  Pound  or  Yard  Basis.  Why  not  then  distribute  on 
the  pound  or  yard  basis?  If  the  mere  number  of  articles  pro- 
duced is  not  a  safe  divisor  of  the  manufacturing  expense,  will 
it  not  be  proper  to  charge  the  pound  or  yard  of  finished  material? 
Not  a  few  factories  have  such  methods.  It  is  quite  common  to 
divide  the  overhead  equally  among  the  main  productive  depart- 
ments ard  then  put  it  into  the  article  on  so  much  per  pound  or 
yard.    The  results  are  dangerously  misleading  figures. 

Take  an  article  which  goes  through  three  departments — the 
foundry,  the  machine  shop,  and  the  assembly  room.  In  the 
foundry  very  little  power  will  be  used,  because  about  the  only 
machines  absorbing  power  are  the  crane,  sandblast,  and  grinding 
wheels.  Likewise  the  machine  expense  will  be  slight.  The 
machine  shop,  on  the  contrary,  will  probably  absorb  most  of 
the  power  furnished  to  the  entire  establishment.  Its  power  and 
machine  charges  will  be  very  large.  In  the  assembly  room  the 
big  cost  will  be  labor.  But  little  equipment  is  needed  and 
consequently  only  a  slight  amount  of  power  is  absorbed. 

If  we  should  divide  the  power  equally  among  these  three 
departments,  the  cost  per  article  in  the  foundry  and  in  the 
assembling  room  would  be  unduly  high,  and  in  the  machine  shop 
would  be  ridiculously  low. 

Take  an  article  on  the  pound  basis.  Follow  the  course  of  a 
big,  rough  casting  such  as  an  engine  bed,  which  may  weigh 
a  ton  or  more.  Labor  cost  in  the  foundry  will  be  slight  because 
the  mold  is  a  simple  one.    But  beside  it  are  a  large  number  of 


OVERHEAD  EXPENSE  257 

small  castings  of  intricate  design.  Where  the  ton  of  metal 
which  went  into  the  engine  bed  needed  almost  no  labor,  the 
small  castings  may  require  an  enormous  amount  and  may  be  a 
long  time  in  the  making.  The  engine  bed  will  be  in  the  machine 
shop  for  no  more  than  two  or  three  days,  while  the  small  parts, 
using  little  metal  but  great  labor,  may  remain  for  as  many  weeks. 

Any  system  which  apportions  costs  on  the  pound  will  overload 
the  engine  bed  and  make  it  appear  that  the  small  castings  are 
being  produced  at  much  less  than  their  actual  cost.  The  time 
which  an  article  takes  while  being  processed  in  traveling  through 
a  department  is  an  important  factor.  When  these  parts  reach 
the  machine  shop  the  engine  bed  may  need  nothing  but  a  few 
holes  bored  into  it,  while  the  small  castings  may  have  to  be 
machined  to  a  thousandth  part  of  an  inch  in  order  to  register 
with  another  part. 

Take  textiles  on  the  yard  basis.  One  finely  woven  fabric 
may  take  three  times  as  long  to  produce  as  a  coarse  fabric.  On 
the  yard  plan  the  manufacturer  would  give  each  an  equal  over- 
head, but  the  fine  fabric  really  has  three  times  the  overhead  of 
the  coarse,  for  it  has  taken  up  three  times  as  much  of  the  expense. 
The  result  would  be  that  the  coarse  fabric  would  probably  be 
sold  above  its  proper  price  while  the  fine  fabric  might  easily  be 
sold  for  less  than  its  actual  cost. 

Or  take  another  instance  on  the  "value  of  material"  basis. 
The  jeweler  makes  a  gold  ring  and  a  silver  ring.  Certainly  the 
gold  ring  should  not  be  charged  with,  say,  sixteen  times  as 
much  overhead  expense  as  the  silver  ring;  but  such  approxi- 
mately would  be  the  result  if  the  distribution  guide  were  the 
value  of  the  material. 

In  the  adoption  of  any  cost  system  it  is  most  important  to 
examine  all  of  the  phases  in  order  to  discover  whether  or  not 
you  are  unconsciously  charging  in  expense  on  the  basis  of  values 
or  weights  rather  than  on  the  true  basis  of  the  actual  absorption 
of  expense  by  the  article. 

The  charge  to  the  material  itself  is  easy  and  it  is  extraordi- 
nary how  insidiously  and  in  how  many  disguises  the  material 
method  will  creep  in.  Therefore  this  one  rule  may  be  deduced 
— never  distribute  expense  with  relation  to  the  cost  of  the  material, 
because  the  value  of  the  material  does  not  indicate  the  labor 
which  may  be  required  to  turn  it  into  a  finished  product. 

The  pound  or  the  yard  basis  is  also  dangerous  excepting 
under  certain  circumstances.    For  instance  the  sorting,  scouring, 


258  BUSINESS  ACCOUNTANCY 

and  carding  of  wool  can  properly  be  computed  on  the  pound, 
and  also  the  melting  in  a  foundry,  for  one  pound  requires  the 
same  treatment  as  another  and  absorbs  the  same  expense. 

Charging  Expense  to  Production.  The  manufacturing  ex- 
pense will  range  anywhere  from  10%  to  700%  of  the  labor  cost. 
Such  wide  variations  may  be  found  even  in  the  same  factory; 
it  is  the  overhead  which  makes  or  breaks  most  concerns.  They 
think  that  they  are  selling  at  a  profit  but,  not  having  made 
proper  allowances  for  overhead,  they  are  actually  selling  at  a 
loss.  If  the  loss  through  improper  distribution  were  evident, 
it  would  not  be  so  serious,  but  it  is  the  kind  of  charge  which 
turns  up  only  on  the  statement  at  the  end  of  the  period,  although 
it  may  be  presaged  by  the  remark  so  frequently  heard : 

"I  am  making  and  selling  at  a  reasonable  profit,  but  I  do 
not  know  where  my  profit  is — the  money  is  not  in  the  bank 
and  the  accounts  receivable  are  not  on  the  books." 

It  is  a  thousand  to  one  that  the  speaker  has  lost  track  of 
his  overhead.    How  is  it  to  be  distributed? 

The  Productive  Hour  Method.  The  departments  which 
contribute  to  the  productive  departments  depend  for  their  exist- 
ence and  the  amount  of  their  work  upon  the  labor  activity  in 
the  productive  portions  of  the  factory.  In  the  payroll  sum- 
maries given  in  Chapter  VI  the  labor  was  reduced  to  productive 
hours.  It  is  obvious  that,  with  certain  exceptions  which  will 
later  be  noted,  the  productive  hour  is  the  basis  upon  which  the 
contributory  expense  should  be  distributed  to  the  production 
department. 

Each  department  has  its  percentage  of  productive  hours  as 
related  to  the  total  factory  time.  Therefore  this  percentage  of 
productive  hours  to  the  whole  is  the  percentage  to  be  taken  of 
the  administrative  and  general  factory  expense,  to  find  the 
share  of  such  expense  for  that  department.  This  share  is  then 
carried  to  the  expense  analysis  as  shown  in  the  examples  given. 

Dividing  into  Production  Centers.  Much  of  the  accu- 
racy of  this  method  of  distribution  will  depend  upon  the  wisdom 
of  the  departmental  divisions.  A  department  is  a  "production 
center" — a  manufacturing  division.  It  may  be  a  whole  build- 
ing, or  a  single  machine ;  the  point  is  to  find  the  unit  of  time  and 
unit  of  occupancy.  The  time  of  the  article  in  passing  through 
a  given  process,  and  the  amount  of  space  which  that  process 


OVERHEAD  EXPENSE  25d 

requires  in  the  general  organization,  are  the  two  factors  which 
determine  the  amount  of  overhead  placed  upon  the  product. 
Therefore  one  divides  and  subdivides  until  even  units  of  the 
time  and  occupancy  are  discovered. 

Consider  a  machine  shop.  Its  tools  vary  widely,  not  only 
in  first  cost,  but  also  in  the  amount  of  power  and  labor  which 
each  requires.  The  planers,  the  boring  mills,  the  light  lathes, 
the  heavy  lathes,  each  absorbs  different  degrees  of  expense.  No 
one  can  deny  that  it  costs  more  to  operate  a  planer  that  may  be 
worth  thousands  of  dollars,  than  a  light  lathe  whose  value  is 
measured  by  hundreds. 

But  what  difference  does  it  make  how  the  expense  is  divided 
over  any  particular  section  of  a  store  or  factory  if  the  expense 
must  be  paid  anyway?  It  does  not  make  a  difference  in  the 
total  result,  but  it  does  make  a  vast  difference  in  the  fixing  of 
the  cost  of  the  product.  Suppose  the  planer  overhead  is  greater 
than  the  lathe  overhead,  should  the  articles  that  go  through 
the  lathe  be  loaded  with  the  same  cost  as  those  that  go  through 
the  planer? 

The  foregoing  distribution  is  known  as  the  "production 
center"  plan.  It  will  give  the  most  accurate  results  in  probably 
the  greatest  number  of  cases  but  it  is  by  no  means  the  only 
accurate  method,  nor  is  it  universal.  No  one  infallibly  accurate 
method  exists  and  I  often  find  that  several  plans  may  well  be 
used  within  the  same  plant. 

Several  other  plans  are  in  general  use.  Any  one  of  them 
may  be  entirely  satisfactory  under  one  state  of  facts  and  entirely 
inaccurate  under  another. 

Methods  of  Distributing  Expense.  1.  The  "labor  dol- 
lar" charge.  The  total  departmental  expense  is  apportioned  as 
a  percentage  on  the  productive  wages  of  the  department.  That 
is,  the  wage  is  counted  as  so  much  paid  to  the  operator  and,  in 
figuring  the  cost,  to  that  is  added  the  fraction  of  overhead. 
From  such  distribution,  one  may  gain  a  fair  idea  of  the  cost  as 
a  whole,  but  it  is  accurate  in  detail  only  when  the  wages  paid 
are  nearly  the  same  throughout  the  department  and  also  the 
machine  costs  are  nearly  alike.  It  will  not  work  out  well  if 
high-priced  and  low-priced  men  are  in  the  same  department; 
for  then,  by  adding  a  larger  sum  to  the  high  than  to  the  low,  the 
lesser  pay  will  appear  to  be  the  more  economical — when  actually 
it  may  be  more  expensive. 


260  BUSINESS  ACCOUNTANCY 

2.  The  "productive  hour"  method.  Each  department  has 
a  certain  number  of  hours  of  production;  we  take  the  average 
number  of  such  hours  or  the  normal  number  and  distribute  the 
overhead  to  these  hours  instead  of  to  the  wages  of  the  operatives. 
Thus  the  high  wage  man  does  not  receive  an  undue  share  of  the 
expense  as  under  the  labor  hour.  It  is  only  accurate  when  the 
equipment  within  the  department  is  all  much  alike.  One  of  its 
strongest  points  is  the  deterrent  effect  upon  permitting  work  to 
lag  within  a  department — it  makes  for  fast  operation. 

3.  The  "machine  hour"  plan.  This  amounts  to  making  a 
department  out  of  a  machine.  Each  machine  collects  its  own 
share  of  overhead  expense  and  direct  labor.  The  total  charges 
are  divided  by  the  normal  number  of  working  hours  of  the 
machine  and  thus  we  have  a  figure  which  represents  the  per 
hour  hire  of  the  machine  for  operations.  The  work  passing 
through  practically  pays  a  rental  for  the  time  which  it  consumes. 

Choosing  the  Right  Method.  In  a  subject  so  empirical  as 
costs  it  is  not  safe  to  dogmatize — it  is  not  safe  even  to  lay  down 
rules  for  various  classes  of  manufacturing.  I  could  not  give  one 
best  method  for,  say,  woodworking  plants,  or  machine  shops, 
or  textile  mills ;  the  exceptions  are  so  numerous  that  harm  might 
follow  the  adoption  of  any  system  based  on  rules  regardless  of 
circumstances.  Instead  of  useless  rules  I  shall  give  a  number  of 
instances  bringing  out  points,  some  of  which  you  have  probably 
met  in  your  own  affairs. 

Earlier  in  this  chapter  false  returns  arose  from  predicating 
costs  in  textile  mills  on  the  yard  basis.  The  proper  way  to 
distribute  the  overhead  in  that  loom  room  would  have  been  on 
the  machine  hour — by  dividing  the  expense  chargeable  to  the 
room  by  the  number  of  machines  of  similar  type  and  then  by 
average  working  hours.  Let  us  say  the  expense  reduces  to  40 
cents  an  hour  per  machine.  If  a  yard  goes  through  in  one  hour, 
a  manufacturing  expense  of  40  cents  is  added  to  it,  but  if  it  takes 
only  half  an  hour,  the  manufacturing  expense  is  but  20  cents. 
Thus  the  larger  amount  of  expense  which  the  higher  grade,  finely 
woven  cloth  absorbs  by  taking  a  longer  time  in  fabrication, 
appears  on  the  cost  sheet  and  prices  may  be  accordingly  regulated. 

In  the  case  of  a  department  which  is  filled  with  a  considerable 
number  of  identical  machines,  they  may  be  classed  together  and 
the  entire  departmental  overhead  taken,  but  if  the  groups  are 
operated  under  different  supervision,  divisions  should  be  made 


OVERHEAD  EXPENSE  261 

for  the  purpose  of  comparison.  This  is  a  convenient  method* 
but  it  can  be  applied  only  when  the  units  are  uniform.  The  choice 
between  the  machine  hour  and  the  labor  hour  will  depend 
largely  upon  the  character  of  the  factory.  If  labor  predominates 
and  the  machinery  is  trivial,  then  undoubtedly  the  labor  basis 
should  be  adopted;  but  if,  on  the  contrary,  as  is  usually  the 
case  in  a  machine  shop,  it  is  the  machines  that  count,  then  the 
machine  hour  should  be  taken  as  a  unit. 

More  frequently  it  will  be  well  to  consider,  in  the  adopting 
of  a  unit,  the  various  departments  as  separate  factories,  and  to 
apply  to  each  the  basis  of  calculation  which  seems  to  fit  the  case. 

When  to  Use  the  Labor  Dollar  Method.  Only  when 
wages  in  a  department  are  fairly  uniform,  is  it  possible  to  divide 
the  overhead  on  the  labor  dollar.  Take  an  example  from  a 
garment  factory.  You  will  find  girls  working  at  20  cents  an  hour 
without  equipment,  and  skilled  men  such  as  cutters,  at  40  cents 
an  hour,  also  without  equipment.  If  we  distribute  the  overhead 
on  the  labor  dollar,  the  man  receiving  40  cents  will  absorb  twice 
as  much  overhead  as  the  girl  at  20  cents,  when,  as  a  matter  of 
fact,  we  know  that  the  higher  the  wage  the  less  supervision  is 
required. 

In  the  manufacture  of  paper  everything  depends  upon  the 
machinery.  The  preceding  processes  are  all  subsidiary,  and  also 
the  succeeding.  The  machinery  and  the  power  that  operates 
it  are  the  vital  points.  Formerly  the  costs  were  calculated  on  an 
average  cost  per  pound  for  the  total  production,  regardless  of 
the  materials  used  or  of  the  process  involved  in  the  production. 
But  such  a  basis  gives  no  clew  as  to  actual  cost;  for  a  rough 
paper,  taking  as  it  does  but  a  short  time  to  pass  through  the 
machinery,  will,  on  the  pound  basis,  absorb  a  greater  proportion 
of  costs  than  the  fine  paper  which  will  take  three  times  as  long  in 
its  manufacture.  The  coarse  paper  may  be  sold  for  too  high  a 
price  and  the  fine  paper  at  too  low  a  price. 

In  fact,  in  one  paper  mill  which  I  studied,  the  average  cost 
per  pound  basis  had  resulted  in  all  but  one  grade  being  sold  less 
than  cost.  The  price  on  the  one  profitable  grade  was  so  high 
that  the  factory  was  able  to  break  even,  although  this  high  cost 
paper  was  not  the  one  which  the  selling  department  had  been 
pushing  on  the  market.  This  is  a  case  for  an  application  of  the 
machine  hour  cost.  Experiments  have  shown  that  there  is  a 
difference  of  as  much  as  300%  in  the  time  taken  to  make  different 


262  BUSINESS  ACCOUNTANCY 

grades  of  paper.  The  actual  length  of  time  which  the  paper 
requires  for  its  making  is  reflected  in  the  final  cost  and  the  maker 
thus  knows  exactly  how  much  overhead  is  to  go  on  that  particular 
grade,  and  therefore  the  resulting  cost. 

In  a  woodworking  establishment  the  cost  distribution  is 
frequently  founded  on  the  productive  labor.  But  a  man  running 
a  planer  deserves  to  be  charged  with  a  considerably  greater 
overhead  than  a  man,  for  instance,  who  is  assembling.  Here  the 
best  plan  would  be  a  combination  of  machine  hours  in  certain 
departments  and  productive  labor  hours  in  others,  according  to 
whether  the  machinery  or  the  labor  predominates. 

When  Is  a  Machine  Economical?  With  the  development 
of  automatic  machinery  the  labor  charge  is  not  always  the 
important  one.  For  instance,  a  big  machine  that  costs,  say, 
$20,000  or  S30,000  and  may  be  operated  by  cheap,  unskilled 
labor — the  labor  charge  is  insignificant — should  be  made  a  depart- 
ment in  itself.  This  point  is  of  particular  importance,  for  other- 
wise one  cannot  judge  of  the  machine  as  an  investment,  and  it  is 
a  check  on  those  fanatics  who  hold  that  it  is  always  economical 
to  substitute  a  machine  for  a  man.  When  we  include  the  total 
overhead  on  a  machine,  it  will  sometimes  be  found  to  be  more 
costly  than  hand  labor.  Or,  again,  the  machine  may  possess  a 
capacity  out  of  all  proportion  to  the  requirements. 

A  mere  machine  is  nothing  in  itself.  It  is  useful  only  if  it 
saves  expense.  I  recall  a  striking  instance  of  one  brilliant 
mechanical  engineer  who,  with  a  single  invention,  revolutionized 
an  entire  industry.  He  constructed  a  machine  which  at  a  critical 
point  in  that  particular  industry  did  away  with  90%  of  the 
human  labor. 

Afterward  he  embarked  in  business  on  his  own  account,  and 
he  used  his  inventive  genius  to  supply  machines  for  every 
possible  operation.  From  a  mechanical  standard  he  was  entirely 
successful,  but  it  turned  out  that  his  new  machines  required  just 
as  many  people  to  tend  them  and  keep  them  in  repair,  as  had 
before  been  employed  on  the  operations.  Where  previously  the 
men  had  done  the  work,  now  the  machines  did  the  work  and  the 
men  tended  them.  The  result  was,  of  course,  increased  expense 
and  therefore  a  loss. 

I  recall  another  case  where  a  small  bit  of  trucking  had  been 
easily  cared  for  by  one  man.  An  automatic  conveyor  was  installed 
and  instead  of  one  man  to  look  after  the  whole  job  it  then  required 


OVERHEAD  EXPENSE  263 

two  men — one  to  load  and  the  other  to  take  off.  A  highly 
efficient  machine  which  can  be  installed  only  at  great  expense 
may  be  used  so  seldom  that  if  the  expense  be  apportioned  to  it, 
its  infrequent  operations  will  be  most  costly.  In  some  cases, 
where  cost  statistics  are  used,  the  factory  takes  in  work 
for  some  of  the  special  machinery  at  a  low  price  simply  to  cut 
down  the  operating  cost  on  the  regular  business. 

Charging  Overhead  on  Material.  A  striking  case  of  the 
fallacy  of  permitting  material  values  to  enter  into  the  distribu- 
tion of  overhead,  came  to  me  from  a  company  manufacturing 
small  articles  out  of  brass  bars  and  castings,  and  sheet  steel. 
The  recent  enormous  increase  in  the  price  of  brass  and  other 
metals  furnishes  an  unusual  emphasis  on  the  result  that  follows 
the  computation  of  costs  on  the  material. 

The  present  price  of  the  bar  stock  out  of  which  a  certain 
article  is  made,  is  about  35  cents  a  pound,  whereas  in  normal 
years  it  has  stood  usually  at  about  15  cents.  Below  is  shown 
the  cost  method  at  present  in  use  as  applied  with  the  material 
at  both  prices. 

Per  100                               Brass  at  15  cents  Brass  at  35  cents    Increase 

Material $3.15  $7.35  $4.20 

Plus  20% _J63  $3.78  1.47    $8.82           .84    $5.04 

Labor $0.43  $0.43  0.00 

Plus  25% .11  .54  .11        .54          0.00      0.00 

Total $4.32  $9.36                    $5.04 

Plus33^% 1.44  3.12                     1.68 

Total  cost $5.76  $12.48                   $6.72 

The  20%  applied  to  materials  is  expected  to  cover  miscella- 
neous supplies  used  around  the  plant;  the  25%  on  labor  is  sup- 
posed to  represent  other  indirect  factory  expenses;  and  33j^%  is 
intended  to  cover  the  general  administrative  cost. 

An  analysis  of  these  figures  showed  that  while  the  material 
cost  had  increased  $4.20,  the  total  cost,  computed  in  this  man- 
ner, had  gone  up  $6.72.  In  other  words,  the  mere  increase  in 
the  price  of  brass  is  made  to  result  in  an  increased  manufacturing 
cost  of  $2.52.  The  large  amount  of  brass  borings  and  turnings 
recovered,  while  charged  into  the  foundry,  is  wholly  neglected 
in  computing  the  cost. 

When  properly  figured,  with  a  departmentalization  of  ex- 
pense and  an  allowance  for  scrap,  the  costs  at  the  two  prices  of 
brass  are: 


264  BUSINESS  ACCOUNTANCY 

Per  100                                 Brass  at  15  cents  Brass  at  35  cents  Increase 

Material $1.99                     S5.70  $3.71 

Manufacturing  cost .74                          .74  0.00 

Total  cost $2.73                      $6.44  $3.71 

It  will  be  seen  that  the  former  method  gave  erroneous  results 
at  both  prices.  This  is  because  brass  is  expensive.  The  absurd- 
ity of  the  figures  is  shown  by  the  following  comparison  which 
will  serve  as  an  excellent  illustration. 

Total  Cost  Brass  at  15  cents    Brass  at  35  cents 

Present  method $5.76  $12.48 

Correct  method 2.73  6.44 

Total  Cost  Brass  at  15  cents    Brass  at  35  cents 

Present  cost  too  high  by $3.03  $6.04 

Present  cost  too  high  by 111%  94% 

Getting  Costs  by  Standardization.  Where  several  sizes  of 
an  article  go  through  the  same  process  so  that  the  single  differ- 
ence between  one  product  and  another  is  the  time  which  it  takes 
in  the  making,  a  short  cut  to  costs  may  be  had.  The  material 
costs  are,  of  course,  taken  separately  as  has  been  explained  in  a 
previous  chapter.  The  most  popular  article — the  one  which  the 
factory  makes  in  the  greatest  quantity — is  taken  as  a  standard, 
and  its  time  of  fabrication  is  carefully  calculated.  The  standard 
time  is  fixed  at  100.  Suppose  that  this  standard  time  of  100, 
which  is  only  an  abstract  figure  taken  as  a  percentage  basis,  is 
actually  90  minutes. 

Another  product  takes  120  minutes — that  is  one  third  longer 
— therefore  its  rating  is  133.  Another  product  requires  150 
minutes  or  60  minutes  over  standard — that  is  two  thirds  more, 
or  expressed  in  terms  of  the  standard,  167.  A  department  turns 
out  a  quantity  of  these  three  units.  We  add  the  units  according 
to  the  standard  and  divide  into  the  overhead  of  the  department. 
The  result  is  the  unit  cost;  the  cost  of  any  single  article  can  be 
computed  from  its  ratio  to  the  standard  cost. 

The  unit  cost  method  can  be  used  in  figuring  many  production 
costs  which  would  otherwise  be  hard  to  detennine.  It  does 
away  with  the  necessity  of  reporting  time  against  individual 
articles  or  operations  and  has  a  large  advantage  in  the  easy  check 
which  it  gives  on  the  efficiency  of  production  and  of  material 
consumption.  A  departmental  excess  in  the  use  of  either  labor 
or  material  will  instantly  fine  up  against  the  standard  of  what 
should  have  been  used. 


OVERHEAD  EXPENSE  265 

This  method  is  not  a  substitute  for  the  direct  methods,  and 
it  cannot  be  used  in  most  instances,  for  it  is  seldom  possible  to 
find  a  unit — never  when  the  variety  of  product  is  great.  But 
it  is  the  unquestionable  plan  whenever  a  unit  is  feasible.  The 
standard  must  be  set  accurately  by  expert  time  studies. 

Ascertaining  the  Final  Costs.  Presuming  that  we  now 
have  some  system  fitted  to  our  needs,  the  finding  of  the  final 
manufacturing  costs  of  the  finished  article,  in  the  shipping  room 
ready  to  go  out  on  order,  is  easy.  The  fixed  charges  have  been 
carried  to  the  departmental  expenses  analysis,  as  well  as  the 
expenses  of  the  contributory  departments,  each  with  its  share 
of  fixed  charge,  through  the  medium  of  the  manufacturing  ex- 
pense analysis.  On  the  sheet  for  the  department  have  been 
gathered  all  of  the  items  of  overhead  for  that  department.  The 
total  contains  all  the  overhead  on  the  work  passing  through  the 
department. 

This  department  total  is  distributed  to  the  work  on  whatever 
plan  has  been  adopted — by  dividing  by  the  productive  hour, 
machine  hour,  labor  dollar,  or  other  means — and  thus  we  have 
the  extra  charge  to  add  to  each  hour  of  work  or  dollar  of  labor. 

Upon  the  final  cost  card  have  already  been  collected  the 
charges  for  material  and  direct  labor,  the  overhead  figures  are 
then  added,  and  the  result  is  the  final  cost. 

Handling  Abnormal  and  Subnormal  Conditions.  I 
have  spoken  of  the  overhead  as  though  it  were  fixed  and  immova- 
ble— as  though  the  amount  of  work  being  done  were  always  the 
same.  We  know  of  course  that  the  business  in  hand  varies  con- 
stantly. What  shall  we  do  with  the  expenses  when  the  plant  is 
either  extraordinarily  busy  or  uncommonly  dull?  In  the  first 
case  the  expense  will  be  distributed  over  a  greater  production 
and  will  therefore  be  less  per  unit,  while  in  the  second  case  the 
distribution  will  be  over  fewer  articles  and  will  consequently 
bear  more  heavily  than  before. 

If  one  normally  makes  1,000  articles  a  day  and  the  overhead 
expense  is  calculated  on  that  production;  then  if  2,000  articles 
are  produced  without  an  appreciable  difference  in  the  indirect 
expense,  our  article  will  have  only  one  half  as  much  of  the  over- 
head to  bear  as  before.  But  if  sales  drop  from  1,000  to  100, 
then  the  proportion  of  expense  would  be  ten  times  the  normal. 

This  is  a  question  which  rightly  bothers  business  men.  Re- 
solve it  into  its  elements.    The  costs  are  based  on  a  certain 


266  BUSINESS  ACCOUNTANCY 

average  output.  If  the  plant  has  a  greater  demand  for  its 
products,  credit  is  undoubtedly  due  to  the  cleverness  and  inge- 
nuity of  the  marketing  force.  But  if,  on  the  other,  it  does  not 
do  a  normal  business,  the  blame  should  be  placed  on  the  selling 
organization.  The  productive  side  should  not  be  expected  to 
do  the  impossible,  that  is,  to  produce  economically  unless  it  has 
orders  which  will  permit  the  maintaining  of  a  fair  average  rate, 
which  of  course  is  quiet  obvious. 

The  expense  analysis  gives  the  actual  overhead  in  each  period. 
It  will  be  low  in  busy  times  and  high  in  dull.  Between  these 
two  limits  we  fix  on  a  figure  which  we  consider  as  normal — based 
neither  on  peak  production  nor  on  the  mirrirmim.  This  we  call 
the  "normal  operating  rate." 

The  normal  operating  rate  for  the  departments  or  machines 
will  vary  in  different  plants  and  can  be  determined  only  after 
study  of  operating  conditions.  A  further  knowledge  of  condi- 
tions in  other  factories  of  the  same  industry  should  be  a  factor 
in  setting  the  proper  normal  rate.  Possessed  of  the  actual  and 
normal  overhead  rates,  all  costs  should  be  figured  using  the  normal 
department  or  machine  rate  of  expense. 

At  times  when  the  current  overhead  rate  is  above  the  normal, 
the  excess  amount  should  be  debited  to  an  "abnormal  business 
account";  whereas  when  the  contrary  condition  exists,  the  dif- 
ference should  be  credited  to  the  same  account.  When  business 
is  exceptionally  good,  a  reserve  is  created  which  can  at  the  end 
of  any  fiscal  period  be  credited  to  surplus  or  carried  as  insur- 
ance against  a  future  shrinkage. 

The  factory  did  not  bring  about  the  conditions  and,  under 
opposite  cost  accountancy,  it  will  not  be  held  responsible  for  them. 
Thus  analyzed  it  seems  ridiculous  to  hold  the  factory  responsible 
for  a  panic  in  the  money  market,  or  a  bad  wheat  crop  or  other 
national  calamities.  But  that  is  precisely  what  many  executives 
in  the  past  have  done,  for  they  held  that  the  productive  side 
should  bear  its  overhead  charge  regardless  of  the  amount  of 
work  which  it  had  on  hand. 

Take  a  case.  Suppose  the  normal  cost  of  an  article  is  $10. 
The  volume  of  orders  so  lessens  that  the  manufacturing  expense 
is  10%  higher  than  normal.  Thus  the  article  costs  $11  to  manu- 
facture. The  selling  price  is  only  $10.50.  It  was  not  the  factory's 
fault  that  more  orders  were  not  obtained,  and  therefore  the  cost 
should  be  maintained  at  $10  with  the  extra  difference  as  an 
abnormal  expense. 


OVERHEAD  EXPENSE  267 

Suppose  in  the  case  above,  the  finished  article  was  inventoried 
at  its  actual  cost  of  $11.  The  sales  price  of  that  article  was 
only  $10.50.  It  cannot  be  worth  more  than  the  price  it  will 
bring.  Therefore  if  the  inventory  carries  a  figure  of  $11,  the 
statement  at  the  end  of  the  year  may  be  inflated  by  the  total 
of  the  finished  goods,  to  such  a  figure  that  what  was  actually  a 
loss  will  show  as  an  apparent  profit.  No  end  of  concerns  have 
gone  to  the  wall  because  they  inventoried  after  such  fashion. 

The  canny  executive  makes  use  of  his  cost  figures  to  get 
business  in  dull  seasons.  Knowing  his  normal  overhead  and  the 
production  which  brings  it  about,  he  can  manipulate  his  prices 
so  to  attract  buyers  that  the  normal  may  be  maintained.  He 
may  lose  on  average  profits,  but  he  earns  expenses  and  keeps  his 
organization  intact  and  running;  whereas  a  smaller  volume  at 
regular  prices  might  become  an  actual  loss  through  the  jump  in 
overhead. 

That  is,  he  determines,  on  sound  data,  the  minimum  sales 
price"  from  which  he  can  sell  intelligently  with  the  thought  of 
making  either  a  slight  profit  or  of  breaking  even. 

The  facts  obtained  through  a  cost  system  have  kept  many  a 
factory  rurming  when  its  competitors  had  to  close  down. 


CHAPTER  XIX 


DETERMINING  THE  SELLING  EXPENSE 

IN  the  previous  chapter  we  saw  that  the  overhead  expense 
was  collected  at  various  sources  and  eventually  flowed  into 
one  or  the  other  of  two  streams.  The  first  was  the  admin- 
istrative and  general  factory  expense  which  has  already  been 
treated;  the  second  is  selling  expense.  Every  expense  which 
does  not  concern  fabrication  goes  to  selling. 

The  factory  bears  all  expense  until  the  product  is  at  the 
door  ready  to  be  shipped,  then  the  questions  are  those  of  sales- 
manship. The  division  is  an  obvious  one,  but,  like  most  obvious 
things,  it  is  neglected.  It  should  be  self-evident  that  efficient 
manufacturing  cannot  be  carried  on  if  inefficiency  and  wastes  in 
the  selling  department  are  charged  back  into  the  cost  of  the 
product. 

If  you  do  not  make  money  you  want  to  know  whether  it  is 
because  you  are  a  bad  manufacturer  or  because  you  are  a  bad 
salesman.  It  is  no  part  of  this  volume  to  take  up  the  relative 
importance  of  good  manufacturing  and  good  selling.  Personally 
I  believe  that  goods  well  made  and  well  designed  for  the  market 
are  two  thirds  sold,  and  that  the  importance  of  sales  organiza- 
tions has  been  considerably  overrated. 

I  think,  generally  speaking,  that  the  salaries  of  salesmen  and 
particularly  of  sales  managers  are  too  high  and  that  those  of  the 
factory  executives  are  too  low.  I  have  never  known  a  thoroughly 
bad  product  to  be  sold  over  any  long  period  of  time;  and  I  have 
never  known  a  thoroughly  good  product  which  did  not  have  a 
ready  sale.  These  remarks  have  nothing  particularly  to  do  with 
the  subject  of  this  chapter  and  I  throw  them  in  only  for 
executive  attention  if  it  appears  that  the  expense  of  bringing  the 
product  to  the  customer  is  inordinately  high. 

Collecting  the  Selling  Expense.  The  total  selling  expense 
is  derived  from  the  expense  analysis  of  the  various  subdivisions 
and  is  collated  on  a  summary  of  expense  analysis  to  which  is 

268 


SELLING  EXPENSE  269, 

added  the  salary  of  the  sales  manager  and  the  proper  proportion 
of  the  fixed  charges  based  upon  the  floor  spaces  actually  occupied 
by  selling  divisions.  This  expense  analysis  is  made  up  on  pre- 
cisely the  same  kind  of  sheet  as  in  the  preceding  chapter  where 
it  was  introduced.  The  subsidiary  records  are  of  the  highest 
importance  because,  to  reiterate,  it  is  only  through  detailed 
analysis  that  economies  are  to  be  effected. 

The  subsidiary  divisions  may  be  as  numerous  and  as  detailed 
as  one  likes.  The  more  common  divisions  are:  (1)  packing  and 
shipping,  (2)  salesman  expense  and  traveling,  (3)  office  expenses, 
(4)  advertising,  (5)  general  or  occasional  selling  expense. 

If  the  concern  has  branch  offices,  the  totals  from  the  branch 
offices  should  be  brought  into  the  summary  and  the  detailed 
analysis  of  each  office  kept  by  itself  in  much  the  same  manner  as 
that  in  the  main  office. 

Divisions  of  Expense.  The  division  of  packing  and  ship- 
ping expense  on  a  geographical  basis,  will  often  give  illuminating 
figures;  the  expenses  of  this  department  should  never  be  carried 
merely  in  bulk.  You  want  to  know  the  sections  in  which  it  is 
profitable  to  sell  and  also  those  in  which  it  is  unprofitable;  and 
though  circumstances  may  force  you  to  sell  in  the  unprofitable 
sections,  you  do  not  want  to  do  so  blindly.  Very  few  concerns 
can  profitably  distribute  all  of  their  snipping  and  packing 
expenses  over  all  territories,  making  the  nearby  point  of  sale 
bear  the  expense  of  the  distant  market. 

The  idea  is  that  you  should  not  only  know  the  profit  on  your 
product  as  it  stands  ready  at  the  factory  door  for  shipment, 
but  also  your  profit  at  the  various  points  of  sale.  In  the  craze 
for  securing  a  national  market,  in  the  pride  of  thinking  that 
your  product  may  be  bought  everywhere  in  the  country,  do  not 
lose  sight  of  the  dollars  and  cents  question — and  you  do  if  you 
do  not  segregate  your  shipments. 

Rating  Salesmen.  In  the  expense  analysis  of  the  salesmen, 
many  points  of  interest  may  be  uncovered.  Without  a  good  cost 
system  you  cannot  tell  which  are  your  good  salesmen  and  which 
are  your  bad  salesmen.  The  good  salesman  is  not  necessarily 
the  man  who  turns  in  the  biggest  lot  of  orders,  but  the  man 
who  makes  for  you  the  greatest  profit.  Therefore,  you  must 
know  your  profit  from  each  salesman. 

To  do  this,  give  each  salesman  a  separate  line  in  the  expense 
analysis  so  that  you  can  compare  his  expense  and  commissions 


270  BUSINESS  ACCOUNTANCY 

from  month  to  month,  and  from  year  to  year.  Then  enter 
against  each  salesman  the  gross  profit  made  on  his  sales,  minus 
the  expense  of  the  salesman  himself,  minus  the  proportion  of 
gross  selling  expense  other  than  for  salesmen.  This  will  give  the 
net  worth  of  that  salesman  to  you  and  also  inform  whether  he  is 
selling  because  of  his  personality  or  whether  the  goods  are 
selling  themselves,  and  he  is  merely  acting  as  an  intermediary.  It 
will  often  be  found  that  star  salesmen  owe  their  reputations  to 
the  goods  and  the  territory  rather  than  to  themselves. 

In  determining  the  relative  merits  of  Smith  and  Jones,  look 
underneath  the  surface  records  to  find  if  Smith,  who  apparently 
has  a  record  three  times  as  high  as  that  of  Jones,  is  not  selling  in 
a  region  which  should  really  produce  six  instead  of  three  times  as 
much  as  the  Jones  territory. 

For  this  comparison  I  divide  the  general  selling  expense 
(exclusive  of  the  expenses  and  salaries  of  the  salesmen  themselves) 
by  the  number  of  salesmen.  That  is,  if  there  are  20  men,  each 
would  take  one  twentieth  of  the  expense.  This  is  not  strictly 
accurate,  because  all  salesmen  do  not  absorb  the  same  portion  of 
expense.  The  poor  salesmen,  like  the  poor  workmen,  usually 
take  more  supervision  and  therefore  expense;  but  it  is  a  more 
equitable  arrangement  than  apportioning  the  expense  on  the 
amount  of  selling.  Most  sales  managers  will  admit  that  it  is  less 
trouble  to  sell  a  $5,000  bill  of  goods  than  to  wheedle  out  50 
$100  orders. 

If,  then,  we  should  divide  on  the  basis  of  gross  sales,  the  man 
who  got  the  big  order  would  be  penalized.  Neither  method  of 
distribution  is  very  satisfactory  and,  for  purposes  of  comparison, 
it  is  often  as  well  to  stop  the  individual  sales  record  with  the 
expenses  of  the  salesman  himself.  These  figures  will  not  then  be 
the  profit  per  salesman,  and  should  not  be  so  confused,  but  they 
will  give  a  guide  to  relative  efficiencies. 

With  a  cost  system  you  may  arrange  your  commissions  to 
salesmen  upon  a  sliding  scale  which  depends  upon  the  profit 
made  in  each  line  and  this  is  the  only  sensible  basis. 

The  Place  of  Advertising  Expense.  In  the  expense 
analysis  of  advertising,  carry  each  medium  of  advertising  as  a 
separate  entry  or,  if  the  advertising  be  very  extensive,  set  up  a 
summary  in  which  only  the  main  heads,  such  as  monthly 
magazines,  weekly  publications,  trade  papers,  newspapers, 
circulars,  sales  letters,  and  so  forth,  appear;  and  then  give  a 


SELLING  EXPENSE  271 

subsidiary  record  to  each  division,  exhibiting  in  detail  not  only 
the  expenditures  but,  insofar  as  possible,  the  results.  I  know  of 
no  manner  in  which  the  exact  value  of  advertising  can  be 
measured. 

In  sales  letters  and  other  mailed  matter  the  replies  give  a 
fairly  accurate  figure,  but  in  newspaper  and  periodical  adver- 
tising, although  devices  for  replies  are  frequent,  these  replies 
cannot  be  taken  as  a  reliable  indication  of  the  value  of  the  money 
which  you  have  expended.  The  return  coupon  method  and  the 
''mention  the  magazine"  method,  or  even  the  fake  department 
idea  (that  is,  asking  the  reader  to  address  department  225 J, 
there  being  no  such  department,  and  the  symbol  having  been 
adopted  merely  to  indicate  the  publication  in  which  the  adver- 
tisement appeared)  all  fall  down  with  the  better  class  of  customer 
— the  class  one  seeks. 

The  business  man  of  today,  if  he  sees  something  that  he  wants, 
makes  a  note  of  the  name  and  usually  dictates  a  letter.  By  the 
time  he  comes  round  to  the  dictation  he  has  more  than  likely 
forgotten  all  about  your  elaborate  department  scheme,  and,  if 
he  does  remember  where  he  saw  the  advertisement,  he  will 
certainly  not  bother  to  tell  you.  Of  course,  he  will  not  use  the 
coupon,  and,  by  the  way,  only  about  one  coupon  in  every 
thousand  is  considered  of  sufficient  value  by  the  advertiser  to 
be  made  large  enough  to  hold  an  ordinary  name  and  address. 
The  real  value  of  advertising  is  what  someone  has  called  the 
"rain  and  sunshine  value"— the  repetitive  bringing  of  your 
article  to  the  attention  of  the  reader  through  attractive  copy. 
If  you  have  your  advertising  classified  somewhat  as  I  have 
suggested,  you  can  regulate  the  expenditures  according  to  your 
sales.  I  would  suggest  that  all  advertising  be  regulated  on  an 
empiric  basis  with  the  thought,  however,  always  in  mind,  that 
the  best  and  most  permanent  results  from  advertising  are  to  be 
gained  through  long  campaigns— that  is,  by  making  the  name  of 
your  product  so  familiar  to  the  reader  that  when  he  comes  to 
buy  a  certain  article,  your  name  is  instantly  implied  by  the  very 
mention  of  the  article.  Authorities  agree  that  one  of  the  high- 
est purposes  of  advertising  is  to  make  your  own  name  the  syno- 
nym for  a  type  of  goods  or  service. 

The  other  divisions  of  selling  expense  are  plain  enough. 
If  your  office  costs  too  much  in  any  one  month,  the  expense 
analysis  will  demonstrate  that  fact  and  you  can  investigate; 
and  so  on  through  the  various  items. 


272  BUSINESS  ACCOUNTANCY 

It  is  always  desirable  to  reduce  the  subsidiary  expense 
account  to  a  percentage  of  the  total  expense,  and  also  to  a 
percentage  of  the  total  selling  expense.  When  these  are  tabulated 
you  can  grasp  proportions  of  your  expense. 

Knowing  your  percentages,  you  have  a  basis  for  comparison, 
not  only  with  what  you  think  the  expense  ought  to  be,  but 
with  the  performances  of  other  concerns. 

The  Distribution  of  Expense.  The  distribution  of  selling 
expense  to  the  product  offers  a  slight  difficulty.  The  usual 
method  is  to  divide  it  on  the  gross  dollar,  and  we  thus  have  a 
figure  for  gross  selling  price,  less  so  much  per  cent  for  selling 
expense.  Back  in  the  chapter  on  materials  (Chapter  XVI)  on 
page  223,  we  had  a  case  of  the  raw  materials  which  went  into 
process  at  a  flat  price  and  which  came  out  in  many  different 
grades,  all  requiring  different  costs  in  manufacture  and  each 
with  a  different  sales  price.  We  were  then  up  against  deciding 
whether  or  not  raw  material  charges  should  be  on  the  raw  vol- 
ume or  on  the  finished  product,  and  it  was  shown  that  the  best 
method  was  to  charge  the  raw  material  in  a  ratio  correspond- 
ing to  the  net  profit  on  the  sale  price  of  the  finished  article. 

Precisely  the  same  principle  may  be,  and  I  think  should  be, 
applied  to  the  distribution  of  selling  expense.  That  is,  the 
article  which  brings  in  a  manufacturing  profit  of  S3  should  carry 
three  times  the  selling  burden  of  that  article  on  which  there  is 
only  $1  profit.  It  is  reasonable  to  suppose  that  an  article  which 
brings  you  a  profit  of  $3  is  three  times  as  hard  to  sell  as  one  with 
a  profit  of  $1,  for  the  less  profit  you  seek  the  less  competition  you 
invite  and  therefore  it  should  take  three  times  as  much  selling 
expense  to  sell  an  article  on  which  the  profit  is  $3  as  that  on  which 
only  $1  profit  is  sought.  Instant  exceptions  to  this  rule  come  to 
mind  and  therefore  I  shall  say  that  it  is  not  a  rule — but  a  thought 
to  be  applied  in  the  distribution  of  your  selling  expense. 

A  final  point.  Whenever  possible,  make  direct  rather  than 
indirect  selling  charges.  If  you  can  so  regulate  your  advertising, 
your  salesmen,  and  other  commonly  indirect  selling  expenses,  so 
that  they  apply  only  to  a  particular  division,  by  all  means  do  so. 
The  direct  charge  is  always  more  accurate  than  the  indirect. 


CHAPTER  XX 

TYING  ALL  THE  COSTS  INTO  THE 
GENERAL  ACCOUNTS 

COST  accountancy  is  the  current  recording  of  operations. 
We  have  considered  it  as  a  separate  department  of  accoun- 
tancy and  thus  one  might  think  that  the  comprehensive 
recording  of  the  activities  of  the  business  is  divided  into  two 
distinct  and  apparently  unconnected  sections — the  business  ac- 
counts and  the  cost  accounts.    In  fact  they  are  connected. 

The  cost  accounts  fit  into  the  business  accounts  at  every  point, 
and  it  is  from  the  general  books  of  the  company  that  we  gain  a 
constant  check  on  the  cost  figures.  In  the  chapter  on  the  trial 
balance  (Chapter  IX)  and  in  the  supplementary  chapter  on  the 
statement  of  operation  (Chapter  XIV)  we  saw  how  retrospective 
costs  could  be  made  up  from  the  historical  accounts.  We  also 
saw  that  it  was  possible  to  bring  those  costs  down  to  considerable 
detail,  although  not  in  sufficient  detail  for  intensive  cost  study. 
The  chief  objection  to  the  method  was  that  we  never  knew  how 
much  anything  cost  until  after  taking  a  physical  inventory  of 
what  we  had  in  hand.  Just  as  we  could  take  the  figures  in  the 
trial  balance  and  from  them  calculate  costs,  we  can  also  work 
from  the  other  end — take  the  cost  figures  and  reconstruct  the 
trial  balance,  and  thus  absolutely  check  results. 

It  is  necessary  to  check  costs.  Despite  the  confidence  one 
may  have  of  the  accuracy  of  all  the  figures,  some  of  the  totals 
are  based  on  estimates,  and  we  cannot  know  if  these  are  accurate 
without  the  agreement  of  an  opposing  record.  No  bookkeeping 
is  complete  unless  each  of  its  operations  has  a  proof  coming  from 
an  outside  source.  Otherwise  no  matter  how  complex  are  our 
books,  we  are  following  only  the  single  entry  system. 

I  have  repeatedly  said  in  the  course  of  this  volume  that  the 
accounts  of  a  business  are  all  correlated  and  that  good  accoun- 
tancy will  afford  a  complete  interlocking  exhibit  of  every  phase 
of  the  business.    Fitting  the  cost  into  the  general  books  will  now 

273 


274  BUSINESS  ACCOUNTANCY 

make  that  statement  good.  In  the  earlier  portions  of  this  volume 
I  have  treated  of  all  of  the  business  accounts,  and  therefore  here 
it  will  be  necessary  only  to  mention  the  accounts  by  name.  I 
say  that  I  have  treated  all  of  the  accounts;  it  would,  perhaps,  be 
more  accurate  to  say  that  I  have  treated  all  types  of  accounts. 
No  general  book  on  accounting  could  hope  to  exhibit  every  pos- 
sible account  division  or  to  give  every  name  by  which  that  divi- 
sion may  be  known. 

The  function  of  the  business  accounts  was  to  show,  by  the 
comparison  of  the  asset  accounts  with  the  liability  accounts,  the 
exact  condition  of  the  enterprise.  We  saw  that  the  critical 
figures  in  the  ascertaining  of  condition  were  the  inventory  of 
material  and  supplies,  of  goods  in  process  and  finished  goods 
and  that  the  books  afforded  no  clew  to  the  value  of  these  several 
items.  The  great  objection  to  taking  off  a  statement  of  condi- 
tion at  stated  intervals  was  the  necessity  of  an  inventory,  which, 
in  a  business  of  any  size  or  complexity,  might  easily  be  a  matter  of 
considerable  expense  and  inconvenience. 

The  cost  system  gives  the  missing  figures.  It  tells  what  has 
become  of  the  goods  and  of  the  labor,  how  and  in  what  amount 
they  have  gone  into  goods  in  process  or  into  finished  goods,  the 
amount  which  should  be  charged  to  the  goods  which  have  been 
sold,  and  thus  we  are  now  prepared  to  construct  a  statement  of 
condition  in  any  necessary  detail  and  without  inconvenience. 

Checking  the  Costs  into  the  General  Books.  The  items 
thus  obtained  through  the  cost  system  check  back  into  the  gen- 
eral books;  while  we  are  taking  the  statement  of  condition,  we 
are  also  checking  the  accuracy  of  the  cost  accounting. 

How  the  two  systems  intertwine  is  graphically  illustrated  in 
the  large  chart  given  as  Form  92,  shown  on  Insert  XII,  which 
is  folded  separately  and  laid  into  the  back  of  the  book. 
From  this  chart  you  can  discover  where  and  how  the  various 
accounts  interlock. 

The  general  business  has  on  its  ledger  a  number  of  nominal 
accounts  which  are  classified  broadly  as  manufacturing  accounts. 

The  materials  account  begins  on  the  debit  side  with  the 
inventory  of  stock  on  hand  at  the  beginning  of  the  period  and 
continues  with  the  posting  of  the  cost  of  materials  purchased 
from  the  charge  register;  the  sum  of  the  debits  is  the  worth  of 
the  material  on  hand  or  that  which  we  bought  during  the  period. 
The  material  is  taken  out  of  stock  by  requisition;  the  total  of  the 


THE  COST  SUMMARY  275 

requisitions  should  should  be  the  amount  of  material  which  has 
gone  into  the  work  in  hand.  The  total  taken  by  adding  the 
requisitions  should  equal  the  material  charges  from  the  job 
cards  in  the  cost  system.  The  amount  so  withdrawn  is  credited 
to  the  material  account  as  going  out  to  goods  finished  or  in  proc- 
ess, which  account  receives  the  amount  as  a  debit. 

Precisely  the  same  procedure  is  followed  in  the  supplies 
account,  except  that,  instead  of  closing  to  goods  finished  or  in 
process,  the  credit  is  to  manufacturing  expense,  and  manufactur- 
ing expense  takes  a  debit  in  the  like  amount. 

The  productive  or  direct  labor  account  takes  its  debit  directly 
from  the  charge  register;  the  credit  is  for  the  entire  amount  and 
is  made  to  goods  finished  or  in  process  because  the  labor  has 
gone  directly  into  the  product;  therefore  goods  finished  or  in 
process  takes  a  debit. 

The  wages  of  non-productive  labor  follow  a  course  similar  to 
the  supply  account  and  reach  the  manufacturing  expense  account 
as  a  debit. 

What  Manufacturing  Expense  Is.  Thus  we  have  the 
account  for  the  work  which  we  are  doing  charged  with  materials 
directly  used  therein  and  with  the  labor  directly  expended  thereon. 
The  other  items  of  the  amount  which  we  have  spent  in  our 
manufacturing  are,  for  the  moment,  suspended  in  the  account  of 
manufacturing  expense. 

The  manufacturing  expense  account  should  represent  all  the 
moneys  expended  during  the  month  for  manufacturing  purposes 
and  which  have  not  already  been  charged  into  goods  finished 
and  in  process  as  direct  labor  or  material.  The  items  reaching 
this  account  will  arise  directly  from  the  charge  register,  from  the 
supply  requisitions,  from  the  non-productive  payroll,  and  from 
the  accrued  items  of  a  more  or  less  fixed  nature,  such  as  depre- 
ciation on  plant  and  equipment,  taxes,  insurance,  and  the  like. 
The  accrued  items  or  prepaid  operating  expenses  are  so  termed 
because  they  are  really  annual  or  term  charges  and  are  to  be 
reduced  for  current  purposes  to  a  monthly  basis. 

Thus,  insurance  being  paid  in  advance,  it  would  not  be  fair 
to  charge  a  single  month's  operations  with  the  total  payment, 
because  that  month  has  taken  only  one  twelfth  of  the  year's 
expenditure.  The  total  of  all  of  these  items  are  eventually 
accounted  for,  but  they  are  held  in  the  various  subsidiary  ac- 
counts and  become  expense  only  as  consumed.    We  therefore 


276  BUSINESS  ACCOUNTANCY 

make  a  monthly  journal  entry  of  the  proportionate  share  of 
such  expense  and  post  as  a  debit  to  the  manufacturing  expense 
account.  The  manufacturing  expense  account  is  then  closed  out 
to  goods  finished  or  in  process. 

In  our  cost  system,  manufacturing  expense  was  collected 
upon  the  departmental  expense  analysis,  the  fixed  charges  being 
proportioned;  the  sheets  containing  the  details  of  the  items 
are  expressed  only  in  totals  on  the  general  books.  Therefore  the 
various  totals  of  the  expense  analysis  sheets  should  be  identical 
with  the  ledger  account  of  manufacturing  expense.  The  sum- 
mary sheet  of  the  expense  analysis  will  thus  check  back  with  the 
ledger  accounts  and  give  complete  proof  of  the  accuracy  of  the 
cost  distribution. 

Referring  back  to  the  chapter  on  purchasing  (Chapter  V) 
it  will  be  noticed  that  in  the  charge  register  a  separate  division 
was  made  for  selling  expense.  From  the  charge  register  comes 
the  debits  to  the  ledger  account  of  selling  expense.  As  in  the 
case  of  the  manufacturing  expense,  the  details  in  the  cost  system 
come  up  through  the  summary  of  selling  expense  analysis  and 
the  subsidiary  sheets.  The  totals  from  the  summary  must 
check  with  the  selling  account  in  the  ledger. 

Handling  Finished  Goods  and  Parts  in  Process.  The 
purpose  of  manufacturing  is  to  produce  goods.  The  books 
chronicle  the  business  progress;  therefore  all  manufacturing 
accounts  eventually  merge  in  goods  finished  or  in  process.  This 
ledger  account  starts  with  the  inventory  of  the  beginning  of  the 
period  and  receives  debits  for  material,  productive  labor,  and 
manufacturing  expense.  That  is,  we  start  the  account  with 
what  we  have  on  hand  and  add  to  it  the  moneys  which  have  been 
laid  out  in  order  to  buy  and  fabricate  goods.  It  is  the  record 
of  what  we  have  done  during  the  month  in  the  way  of  production. 

Certain  of  the  goods  are  in  a  finished  state  ready  for  shipment. 
We  know  their  number.  If  we  multiply  this  number  by  the 
cost  per  article,  as  taken  from  our  cost  system,  we  shall  have 
the  finished  cost  of  that  which  is  ready  for  shipment.  This 
amount  we  can  credit  to  goods  in  process  and  debit  a  new  account 
entitled  finished  goods,  if  we  desire  to  keep  separate  tally  of  that 
which  is  ready  for  shipment  and  that  which  is  still  in  the  process 
of  making. 

If,  however,  the  volume  is  not  sufficiently  large  to  warrant 
the  two  accounts  or  if  there  is  no  particular  desire  to  separate 


THE  COST  SUMMARY  277 

them,  then  we  retain  all  of  the  goods — whether  finished  or  in 
process — in  the  one  account  entitled  goods  finished  or  in  process. 

As  goods  are  shipped,  we  multiply  the  number  shipped  by 
the  cost  per  unit,  credit  the  total  to  goods  finished  or  in  process, 
and  make  the  debit  in  a  new  account,  cost  of  goods  sold.  If 
both  the  goods  in  process  and  finished  goods  accounts  are  carried, 
the  final  credit  is  to  finished  goods  instead  of  to  goods  in  process. 

The  balance  in  the  finished  goods  account  always  represents 
the  cost  value  of  that  which  is  on  hand  ready  to  go  out  on  orders. 

I  have  treated  each  of  these  accounts  as  inclusive  heads. 
They  should  not  be  inclusive  unless  the  concern  makes  only 
one  line,  for  otherwise  why  go  to  a  vast  amount  of  trouble  to 
secure  details  on  costs  and  then  abandon  them  in  an  omnibus 
account?  Grouping  accounts  defeats  one  of  the  main  purposes 
of  cost  accountancy,  which  is  to  afford  detailed  comparisons  in 
order  that  manufacturing  wastes  may  be  eliminated. 

The  foregoing  accounts  will  serve  as  models  for  the  accounts 
subsidiary  to  them  which  will  be  identical  in  form.  These 
subsidiary  accounts  should  give  the  details  of  each  kind  or  type  of 
article  which  is  manufactured.  That  is,  they  should  be  arranged 
so  that  like  can  be  compared  with  like  and  thus  permit  the 
manufacturer  to  know  where  he  is  making  money,  where  he  is 
losing  money,  and  where  economies  or  better  management  will 
be  in  order. 

We  now  have  all  the  facts  for  a  statement  for  the  month  or 
whatever  period  has  been  chosen.  The  inventory  difficulty  that 
hampered  frequent  business  statements  has  disappeared.  Our 
inventory  is  on  our  books  and  taking  off  a  statement  is  purely  a 
bookkeeping  matter. 

Determining  the  Frequency  of  Making  Statements. 
How  often  should  such  statements  be  compiled?  Here  again 
we  must  consider  the  personal  equation  and  the  nature  of  the 
business.  I  would  say  with  some  positiveness  that  they  should 
not  be  less  frequent  than  once  a  month;  in  some  concerns,  once  a 
week  is  desirable;  and  there  may  even  be  cases  where  a  daily 
exhibition  is  useful.  But  as  I  have  said  before,  daily  and  weekly 
statements  may  be  a  source  of  trouble,  and  they  should  be 
supplemented  by  monthly  statements  and  also  by  quarterly  and 
annual  statements.  Business  does  not  change  much  from  day 
to  day.  The  figures  which  we  obtain  will  not  convey  much 
unless  they  can  be  compared  with  the  figures  of  similar  periods, 


278  BUSINESS  ACCOUNTANCY 

and  these  periods  are  valuable  only  as  they  give  a  perspective 
of  the  business. 

For  instance,  it  would  not  tell  us  anything  in  particular  to 
compare  January  20  of  this  year  with  January  20  of  last  year, 
because  one  of  those  days  might  have  been  in  the  middle  of  a 
blizzard,  or  of  an  epidemic,  or  surrounded  by  some  condition 
which  made  it  totally  unrepresentative.  But  did  we  compare 
the  two  months  of  January  then  we  should  be  apt  to  hit  an 
average;  or,  if  extraordinary  conditions  obtained  in  one  month 
so  as  to  take  it  out  of  the  normal,  then  it  would  be  possible  to 
make  a  note  explaining  the  circumstances.  My  general  con- 
clusion is  that  statements  are  not  commonly  of  much  value 
when  taken  more  frequently  than  monthly;  although,  of  course, 
that  which  I  say  must  be  qualified  by  circumstances. 

Handling  Sales.  The  item  which  has  not  yet  been  touched 
on  is  sales.  The  gross  sales  are  entered  in  the  account  of  that 
name.  The  total  credit  entries  minus  the  debit  postings  from  the 
cost  of  goods  sold  gives  the  gross  trading  profit.  From  this 
total,  deduct  the  selling  expense  and  the  result  is  the  net  profit 
of  the  period. 

The  statements  may  be  elaborated  to  any  degree.  An 
excellent  type  for  a  business  manufacturing  a  variety  of  lines 
is  shown  on  Insert  III.  There  the  profit  or  loss  was  carried 
by  lines  manufactured  and  the  cost  summary  made  up  from  all 
of  the  several  operations.  Where  a  profit  is  made  the  total  shows 
black,  where  there  is  a  loss,  red.  The  executive,  merely  by 
running  his  eye  along  the  totals,  finds  the  weak  spots — the  spots 
to  which  he  must  give  attention — glaring  out  at  him  in  red. 

If  the  product  is  sold  through  salesmen,  another  summary 
should  show  the  marketing  by  salesmen  with  the  profit  or  loss 
on  each  salesman.  And  again  it  is  often  valuable  to  arrange 
the  sales  territorially — either  by  selling  divisions  or  by  states. 
Territorial  statements  afford  a  splendid  check  upon  the  tendency 
to  give  full  sway  to  the  mere  pride  of  selling  everywhere. 

It  may  be  good  policy  to  sell  everywhere  at  one  price,  but 
undoubtedly  there  should  be  no  conclusion  in  the  mind  of  the 
management  as  to  the  relative  values  of  sales  in  different  sections. 
Knowing  these  relative  values,  then  the  prices,  credits,  and  in 
fact  all  of  the  details  of  the  business  can  be  given  executive 
regulation.  For  instance,  the  credit  losses  in  some  states  may 
make  it  necessary  to  point  out  to  the  credit  department  that 


THE  COST  SUMMARY  2?d 

unless  business  there  can  be  done  on  a  cash  basis  it  will  not  be 
profitable  to  sell. 

Had  the  statement  brought  the  burden  of  all  credit  losses 
back  on  the  product  we  should  have  found  that  the  bad  debtors 
of,  say  one  or  two  sections,  were  raising  all  our  prices,  and  putting 
us  at  a  disadvantage  with  the  man  who  was  not  indulging  in  the 
luxury  of  selling  in  sections  where  credit  was  abnormally  bad. 

The  number  of  executive  reports  which  can  be  arranged  from 
the  data  included  in  the  detailed  monthly  statement  is  almost 
infinite.  Any  fact  concerning  the  business  may  be  had,  and  just 
how  these  facts  are  to  be  arranged  will  depend  upon  choice.  I 
have  indicated  policy  types.  They  are  not  inclusive — they  are 
only  suggestions  which  it  is  hoped  will  be  stimulating.  But 
the  owner  or  the  executive  who  wants  to  see  success,  will  un- 
doubtedly have  his  own  ideas  of  the  facts  that  he  particularly 
wants  to  know. 


CHAPTER  XXI 

ACCOUNTING  FOR  THE  MAN  WHO  SELLS 
PERSONAL  SERVICE 

THE  most  complicated  problems  of  cost  accountancy 
naturally  arise  in  manufacturing,  because  there  we  have  the 
critical  point  of  distributing  the  overhead  burden.  When 
the  manufacturer  also  sells  his  product  directly  or  through 
agents,  he  had  in  some  measure  nearly  all  of  the  known  problems 
of  accountancy  in  their  simple  or  in  their  more  complex  forms. 

The  application  of  cost  accountancy  to  any  section  of  com- 
merce whose  activity  is  less  than  that  of  a  combined  manu- 
facturing and  selling  organization  is  a  matter  of  lopping  off 
here  and  there. 

Take  the  man  who  sells  only  services — a  professional  man  or 
a  contractor  who  agrees  only  to  construct  and  not  to  furnish 
materials.  There  are  so  many  lines  that  fall  under  this  inclusive 
head  that  it  is  useless  to  try  to  enumerate  them  and,  in  addition 
to  the  easily  classified,  one  has  the  various  gradations  which 
have  some  of  the  earmarks  of  manufacturing  and  merchandising. 

There  may  be  a  material  charge  but,  as  in  the  case  of  a 
contractor,  it  may  be  entirely  a  direct  charge  to  the  job,  so  that 
what  he  actually  sells  are  the  services  of  his  organization.  In 
almost  any  case  where  the  material  comes  in  finished  form,  and 
the  sole  questions  is  its  installation,  then  that  business  falls  into 
the  class  of  service  selling  as  distinguished  from  manufacturing 
or  merchandising. 

Since  in  service  selling  we  carry  no  stock  and  do  not  manu- 
facture, we  are  at  once  rid  of  the  charge  for  materials  and  for 
factory  overheads.  We  have  already  seen  in  the  chapter  on 
manufacturing  expenses  that  in  no  event  should  overhead  be 
apportioned  on  the  basis  of  the  value  of  material.  Therefore  if 
material  be  supplied  by  one  who  sells  principally  services,  the 
material  charges  (handling,  freight,  and  so  on),  will  all  be  direct 
charges  against  the  particular  job. 

280 


PERSONAL  SERVICE  ACCOUNTING  281 

Supplies  are  absorbed  in  the  overhead  expense;  our  business 
is  really  to  sell  services,  thus  the  overhead  arising  from  supplies 
finds  its  way  into  selling  expense. 

The  big  item  is  labor;  and  here  some  of  the  methods  of  time- 
keeping outlined  in  Chapter  XVII  on  factory  labor,  may  be  used. 
Job  cards  should  be  provided  for  each  man  for  each  job,  or,  if  a 
considerable  number  of  men  are  employed  on  identical  tasks  on 
the  same  job,  then  all  of  these  men  can  be  carried  on  the  same 
sheet  with  divisions  noting  the  time  of  each.  That  is,  instead  of 
the  labor  time  originating  on  job  cards  and  eventually  finding 
its  way  into  a  summary,  the  summary  may  be  made  at  once. 
The  time  from  the  job  cards  should  be  checked  with  the  number  of 
hours  of  available  time  in  order  to  check  the  payroll,  for  it  will 
sometimes  be  found  that  a  workman  will  turn  in  a  number  of 
detailed  records,  and  having  guessed  at  the  time  for  each  job, 
his  total  chargeable  time  will  exceed  that  which  he  could  possibly 
have  worked. 

It  is  always  desirable  to  put  the  divisions  of  time  on  the  card 
itself  so  that  the  operator  need  only  check  off  these  divisions. 
If  he  is  permitted  to  put  down  his  total  time,  he  will  guess  at  it. 
If  he  actually  spent  2%  hours,  he  is  apt  to  charge  either  2  hours 
or  3  hours — usually  the  nearest  time  that  may  be  expressed  in 
round  figures.  As  in  factory  labor  one  must  know  exact  times  of 
labor  so  that  the  idle  hours  may  be  picked  out  and  charged  to 
overhead  or  studied  and  eliminated;  hence  an  adaptation  of 
Form  79,  given  on  page  235,  is  desirable,  except  where  there  is  a 
timekeeper  on  the  job  itself. 

Handling  Traveling  Expenses.  If  the  employee  travels 
and  is  for  a  period  under  his  own  direction  accruing  expense 
both  for  salary  and  for  traveling,  the  form  of  expense  and  time 
report  given  in  Form  51  shown  on  page  120,  cannot  be  bettered. 
This  form  not  only  apportions  the  time  to  the  job  or  jobs,  but 
it  also  gives  on  the  same  sheet  his  standardized  traveling 
expenses;  standardizing  expense  is  most  desirable. 

You  say  in  effect  to  your  employees:  "You  can  spend  what 
you  like  on  your  traveling,  but  I  shall  allow  only  according  to  a 
certain  fair  schedule  of  rates  which  is  provided  on  the  back  of  the 
expense  sheet."  Thus  you  can  estimate  in  advance  precisely 
what  the  traveling  and  living  expense  will  be  and  put  an  other- 
wise uncontrollable  item  into  the  controlled  class.  You  can  tell 
a  client  in  advance  precisely  how  much  he  is  going  to  be  charged 


282  BUSINESS  ACCOUNTANCY 

and  avoid  the  disagreeable  features  of  an  argument  over  expense. 
If  the  rates  are  fairly  fixed,  the  employees  have  no  ground  for 
complaint.  The  extravagant  men  who  spend  over  the  fixed  rate, 
spend  their  own  and  not  your  money;  the  careful  men  keep 
within  the  fixed  rate  and  they  make  money.  In  fixing  a  rate, 
one  should  calculate  sums  that  would  exactly  repay  an  ordinary 
man  on  his  outlay  for  comfortable  living.  Then  the  extraordinary 
man  will  either  lose  or  make  money  according  to  the  bend  his 
mind  takes. 

The  point  immediately  arises  in  any  case  of  traveling  to 
outside  work,  whether  it  be  a  journey  of  one  half  hour  in  the  city, 
or  a  journey  of  a  day  or  more  in  the  country,  as  to  when  the  time 
with  which  the  customer  is  to  be  charged  begins  and  also  how 
much  of  the  traveling  expense  is  properly  his. 

Suppose  you  have  an  office  in  New  York  and  you  are  called 
to  a  job  in  Pittsburgh.  The  men  whom  you  want  to  send  are  in 
Boston.  Should  you  charge  your  customer  with  the  fare  and 
time  from  Boston  to  Pittsburgh?  Of  course  you  should  not. 
Suppose  the  men  whom  you  wanted  to  send,  instead  of  being  in 
Boston,  were  in  New  Zealand?    I  think  that  answers  the  question. 

The  time  and  the  traveling  expense  to  be  charged  must  be 
calculated  from  your  own  office  to  the  job;  and  if  you  take  a  man 
from  another  point — although,  of  course,  you  must  allow  him  his 
time  and  expenses  in  reaching  the  job — you  can  charge  the 
customer  only  with  the  expense  and  time  which  it  would  require 
to  make  the  journey  from  your  own  office.  Thus  you  lose  money. 
But,  conversely,  if  your  employee  happens  to  be  at  a  point  nearer 
to  the  job  than  your  office,  you  will  properly  charge  fare  and 
time  as  though  he  had  come  from  your  office — although  the  fare 
and  time  might  exceed  that  actually  spent.  In  the  one  way  you 
lose  money  and  in  the  other  you  make  money,  and  it  more  or 
less  evens  itself  up  in  the  end. 

The  Place  of  Office  Burden.  The  overhead  or  burden  con- 
sists of  office  expense,  supervision,  and  other  obvious  items  de- 
pending upon  the  business.  It  is  gathered  with  an  expense 
analysis  sheet  precisely  as  is  manufacturing  and  selling  expense. 
The  total  of  the  overhead  is  treated  as  a  selling  expense  and  is 
distributed  on  the  hourly  basis  over  your  normal  productive 
working  force. 

For  instance,  if  your  normal  force  be  10  men  and  you  pay 
them  for  54  hours  a  week  or  225  hours  a  month,  you  will  have  a 


PERSONAL  SERVICE  ACCOUNTING  288 

total  working  month  of  2,250  hours.  This  divided  into  your 
overhead  expense  will  give  you  the  amount  per  hour  to  be 
charged  to  the  men's  time  as  overhead. 

Handling  Dull  and  Rush  Seasons.  If  you  take  on  addi- 
tional men  for  a  particular  job  and  not  as  regular  employees, 
the  time  and  the  expense  of  those  men  will  be  charged  directly 
against  the  job  and  they  will  not  absorb  a  share  of  the  overhead 
burden.  In  most  cases  where  services  alone  are  sold,  the  organi- 
zation is  largely  executive  and  fairly  stable  in  character,  and 
therefore  it  would  be  unwise  to  lower  the  overhead  each  time  a 
temporary  addition  is  made.  It  is  better  to  treat  the  extra  men 
as  direct  charges — just  as  you  would  material. 

If,  however,  an  abnormally  dull  season  compels  the  cutting 
down  of  the  permanent  force,  you  will  have,  of  course,  an  increase 
in  overhead  because  there  will  be  fewer  hours  to  divide  into  the 
total  expense.  Probably  the  total  of  your  overhead  will  also 
decrease,  so  that  a  new  calculation  would  not  be  very  different 
from  the  old  percentage.  But  if  there  be  a  radical  rise  in  the 
overhead,  I  think  that  it  is  better  practice — unless  the  rise 
threatens  to  become  permanent — to  treat  the  added  overhead 
as  an  abnormal  expense.  This  principle  was  quite  fully  discussed 
on  pages  265  to  267  in  connection  with  abnormal  and  subnor- 
mal manufacturing  expense. 

In  every  office,  clerical  work,  report  typing,  or  other  inside 
matters  directly  chargeable  to  a  particular  job,  should  be  treated 
as  direct  charges  and  not  as  a  part  of  the  overhead.  If  one  makes 
up  an  extensive  set  of  plans  or  an  elaborate  report,  the  charge  is 
certainly  against  the  man  who  orders  the  work  and  should  not 
be  distributed  as  overhead,  consequently  loading  up  another 
plan  or  report.  Cards  corresponding  to  "job  cards"  should  be 
provided  for  such  of  the  office  force  as  do  not  work  exclusively 
on  overhead  affairs.  Their  time,  taken  off,  will  go  either  to 
direct  charges  or  to  expense. 

Summarizing  the  Charges.  The  summary  of  charges  in 
the  sale  of  services  is  quite  simple,  and  an  excellent  form  which 
may  be  adapted  to  other  fines  is  shown  on  Insert  VIII. 
Here  the  facts  of  the  contract  or  the  job  are  given  at  the  top. 
In  the  columns  provided  are  first  charged  the  fees  and  the 
expenses  according  to  the  rate  in  vogue.  Then  follow  four 
columns  devoted  to  cost :  first,  the  salary  and  the  expense  which 
is  chargeable  and,  second,  the  salary  and  expense  which  is  not 


284  BUSINESS  ACCOUNTANCY 

chargeable;  the  "non-chargeable"  being  such  items  of  actual 
time  or  expense  as  are  not  devoted  to  the  job  or  operation,  as 
where  the  journey  is  made  from  a  point  further  away  from  the 
installation  than  your  own  office.  Then  the  direct  office  expenses 
are  put  in  from  the  cards. 

Thus  we  have  the  exact  cost,  the  salary  items  having 
accumulated  their  proper  share  of  the  overhead. 

The  amount  of  the  final  fee  charged  is  based  on  whatever 
percentage  or  other  method  fits  the  case.  A  contractor 
will  base  his  fee  on  a  percentage  of  the  cost;  the  professional  man 
may  also  adopt  some  such  method,  or  may  regard  his  costkeeping 
only  as  a  means  of  knowing  the  proper  charge  minus  his  own 
skill.  He  will  assess  his  skill  on  the  basis  of  the  benefit  he  has 
given  to  the  client,  and  in  this  case  the  actual  fee  may  have  no 
relation  to  the  costs  incurred.  But,  even  in  such  an  event, 
the  cost  records  are  of  value,  for  one  must  know  how  much  of 
his  income  is  profit  and  he  must  have  some  intelligent  method  of 
ascertaining  the  net  cost  of  his  own  services. 

I  have  only  indicated  methods  because  the  principles  have 
already  been  given  in  the  chapters  on  manufacturing  costs — 
many  of  them  are  applicable  to  the  man  who  sells  services  if 
only  he  omits  that  which  he  does  not  need. 


CHAPTER  XXn 

ACCOUNTING  FOR  THE  RETAILER 

NO  theoretical  difference  exists  between  the  accounting  of 
retail  merchandising  and  that  of  the  selling  side  of 
manufacturing;  the  same  principles  hold  for  each,  but 
their  practices  diverge  sharply.  The  most  diversified  manu- 
facturing business  has,  compared  with  a  retail  store,  com- 
paratively few  different  kinds  of  articles;  the  manufacturer 
must  of  necessity  arrange  his  costs  and  his  sales  by  units,  and 
although  the  number  of  units  may  be  very  large,  their  classi- 
fications will  seldom  be  numbered  above  the  hundreds. 

The  retail  store,  on  the  contrary,  has  thousands  of  units 
where  the  manufacturer  has  hundreds — and  in  the  case  of  a 
department  store  or  a  general  store,  it  may  be  millions  instead 
of  hundreds.  It  would  be  entirely  possible  to  carry  on  retail 
accounting  by  units  and  the  results  obtained  would  be  satis- 
factory and  accurate — but  the  labor  involved  would  be 
tremendous.  To  carry  the  separate  units  through  inventories, 
costs,  and  the  like,  in  a  large  department  store,  would  require 
in  the  cost  department  almost  as  many  clerks  as  there  are 
salespeople  in  the  selling  department.  The  finding  of  the  cost 
of  doing  business  would  more  than  absorb  any  possible  profits. 

If  the  retail  store  should  have  but  a  very  few  lines — as  in  the 
case  of  a  small  number  of  extremely  expensive  specialty  shops — 
then  the  unit  system  of  accounting  and  costkeeping  as  outlined 
in  the  manufacturing  sections  of  this  book  could  successfully  be 
used,  with  only  the  omission  of  such  accounts  and  such  pro- 
cedures as  are  provided  for  operations  which  do  not  come  within 
the  comprehension  of  the  retailer.  However,  the  number  of 
shops  which  are  in  a  position  to  make  such  adaptations  are  so 
few  that  they  need  not  be  considered. 

Determining  the  Basis  of  Merchandising  Costs.  Since 
the  number  of  separate  articles  is  so  great  that  unit  costs  are  not 
feasible,  we  abandon  unit  costs  as  a  basis  and  work  with  the 

285 


286  BUSINESS  ACCOUNTANCY 

selling  prices  oi  lines  in  departments  (except  in  the  case  of 
individual  articles  of  great  value,  such  as  expensive  pieces 
of  jewelry  on  which  we  may  keep  individual  costs).  The  selling 
figure  is  adopted  because  it  is  by  that  price  that  the  goods  are 
known  throughout  the  store,  and  it  would  be  confusing  to 
introduce  the  price  at  which  the  goods  had  originally  been 
purchased. 

In  manufacturing  we  dealt  with  the  cost  price  and  the 
margin  of  profit;  their  sum  was  the  sales  price.  Now  we  have 
the  selling  price  and  the  "mark-up."  We  use  the  selling  price 
in  most  of  our  calculations  and  this,  less  the  "mark-up,"  will 
give  the  purchasing  price.  Except  that  we,  so  to  speak,  work 
backward,  cost  finding  in  retail  merchandising  is  not  very 
different  from  cost  finding  in  manufacturing. 

Many  of  the  principles  previously  explained  in  this  book 
are,  with  slight  changes,  adaptable  to  any  kind  of  retail  mer- 
chandising and  the  keen  merchant  will  undoubtedly  be  able  to 
adopt,  for  his  own  system,  much  of  that  which  has  already 
been  given.  For  instance,  the  chapters  on  purchasing,  payment, 
the  money  coming  in,  the  closing  of  the  books,  the  statement  of 
condition,  depreciation,  and  the  appraisement  of  good  will, 
contain  methods  which  may  be  used  by  anyone.  But,  as  I 
have  said  in  almost  every  chapter,  no  set  of  forms  and  no  rules 
other  than  the  fundamental  rules  of  bookkeeping  can  be  adopted 
blindly  by  any  business.  One  retail  store,  by  reason  of  its 
conditions,  may  require  an  accounting  which,  in  detail,  will  be 
quite  different  from  the  store  across  the  street — but  the  prin- 
ciples will  not  change. 

What  Is  a  Department?  I  have  chosen,  to  illustrate  the 
accounting  of  retail  merchandising,  a  department  store  of 
moderate  size  located  in  a  city  of  about  1,000,000  people.  The 
procedure  was  installed  by  me  and  has  been  in  successful  opera- 
tion for  some  years.  I  have  chosen  a  department  store  in  order 
that  as  many  as  possible  of  the  varied  phases  of  accounting  may 
be  included.  But  this  choice  does  not  mean  that  the  methods 
discussed  are  only  for  a  department  store,  and  also  it  does  not 
mean  that  because  you  do  not  call  yourself  a  "department  store" 
that  you  are  not  one.  Nearly  every  store  is  the  better  for  being 
divided  into  accounting  departments,  although  it  is  entirely 
unnecessary,  except  for  the  convenience  to  customers  and  the 
disposal  of  stock,  to  make  a  physical  division. 


RETAIL  ACCOUNTING  287 

Take  any  hardware  store.  It  will  cany  hardware  of  various 
kinds — ranging  from  nails  to  lathes — and  will  probably  also 
include  paints.  The  ordinary  drug  store  will  be  at  least  divided 
into  prescription,  patent  medicine,  and  soda  water  sections. 
The  haberdashery  will  certainly  have  departments  for  underwear 
and  shirtings,  gloves,  ties,  collars,  and  so  on,  with  possibly  hats 
and  some  form  of  ready-to-wear  garments.  All  of  these  stores 
are  department  stores;  the  term  does  not  necessarily  connote  a 
ten-story  building  filling  a  city  block.  The  concern  occupying  an 
eight  by  twelve  hole  in  the  wall  may  be,  in  its  way,  as  much  of  a 
department  store  as  Wanamaker's  or  Marshall  Field's. 

In  the  chapter  on  manufacturing  expense  (Chapter  XVIII)  the 
necessity  of  dividing  a  factory  into  departments,  throughout 
each  of  which  the  same  conditions  would  obtain,  was  shown. 
In  retail  merchandising  a  like  division  should  be  made — and 
much  of  the  accuracy  of  the  accounting  in  merchandising  will 
depend  upon  the  judgment  with  which  the  store  is  depart- 
mentalized. Accurate  costs  cannot  be  had  if  perishable  goods  are 
grouped  with  staples.  Women's  hats,  which  lose  almost  their 
entire  value  after  one  season,  cannot  be  placed  in  the  same 
department  with  linens.  Therefore,  put  only  one  general  line 
into  a  department;  the  guide  is  common  sense.  Too  many 
departments  make  the  accounting  too  expensive;  too  few  depart- 
ments make  the  costs  too  general. 

The  Reasons  for  Frequent  Turnovers.  The  compelling 
idea  in  all  accounting  is  to  learn  how  and  why  we  make  money — 
conversely,  how  and  why  we  lose  money.  Such  studies  cannot 
be  made  from  bulk  figures,  but  only  from  records  which  narrowly 
confine  their  subject  matter  in  order  that  the  weak  and  the 
strong  portions  may  be  localized.  We  make  a  profit  by 
completing  the  cycle  of  business;  that  is  by  laying  out  money  in 
the  purchase  of  goods,  selling  those  goods  at  a  higher  price  than 
we  paid  for  them,  and  thus  bringing  in  to  us  more  cash  than  we 
started  with.  If  we  complete  this  cycle  but  once  during  the 
year  we  shall  make  but  one  profit,  but  if  we  complete  it  10 
times  during  that  period,  we  shall  have  10  profits. 

The  completion  of  a  cycle  is  called  the  turnover  of  a  stock, 
and  the  number  of  times  that  we  turn  our  stock  during  the  year 
is  our  rate  of  turnover.  The  rate  of  turnover  is  the  controlling 
factor  in  the  retail  merchandising  of  today,  and  the  eternal 
problem  of  the  merchant  is  to  so  adjust  his  costs  and  his  profits 


288  BUSINESS  ACCOUNTANCY 

that  a  reasonable  rate  of  turnover  may  be  had.  What  is  reason- 
able is  a  question  of  circumstances.  The  store  dealing  in  pearls 
could  not  have  the  rate  of  a  well-managed  5-  and  10-cent  store. 
The  high-priced  specialty  shop  must  usually  be  content  with  a 
lower  rate  of  turnover  than  the  shop  which  makes  a  specialty 
of  selling  popular-priced  clothing. 

We  must  know  our  rate  of  turnover  as  a  whole — but  that 
knowledge  will  not  be  an  aid  to  increasing  our  profits  unless  we 
know  the  component  departmental  rates  of  turnover.  The 
more  closely  we  departmentalize,  the  more  detailed  will  be  our 
analysis  of  our  rate  of  turnover,  and  therefore  we  shall  be  better 
equipped  to  deal  with  the  problems  of  increasing  the  revolutions 
of  our  business  cycle. 

Various  methods  by  which  rates  of  turnover  may  be  increased 
and  the  yearly  profits  swelled,  belong  to  the  subject  of  mer- 
chandising in  general  and  not  to  accounting,  but  the  business 
man  cannot  apply  the  great  mass  of  merchandising  knowledge 
which  now  exists,  unless  his  accounts  are  so  ordered  that  his 
business  is  constantly  dissected  before  him.  Therefore  the 
foundation  of  increased  profit  and  better  business  is  accurate 
and  illuminative  accounting. 

The  bookkeeping  of  too  many  stores  is  a  mere  record  of 
purchases  and  sales  and  contains  little  more  than  the  bare  facts 
of  what  we  bought  and  what  we  owe,  of  what  we  sold  and  what 
is  owing  to  us,  and  the  cash  that  we  have  in  bank.  With  only 
such  records  as  these  the  owner  or  executive  cannot  do  more 
than  guess,  and  if  his  business  succeeds  it  is  merely  because  he  is 
a  good  guesser.  The  best  business  men  are  good  guessers,  but 
they  restrict  their  guessing  to  estimating  the  tastes  of  the  public 
and  do  not  bring  their  speculative  faculties  to  the  task  of  esti- 
mating the  progress  of  business. 

The  Fundamental  Books  to  Keep.  The  books  which  I 
advocate  for  any  retail  merchandising  enterprise,  even  of  the 
very  simplest  description,  are  four  in  number.  They  are: 
(1)  the  charge  register  (sometimes  called  the  merchandising 
and  expense  register),  which  has  displaced  the  cumbersome 
journal;  (2)  the  daily  sales  register;  (3)  the  cash  book — the 
form  of  which  will  depend  upon  the  size  of  the  business;  and 
(4)  the  general  ledger. 

These  may  be  supplemented  by  any  number  of  subsidiary 
accounts  and  books  which  the  nature  and  size  of  the  enterprise 


RETAIL  ACCOUNTING  289 

demands.    The  forms  of  these  books  will  be  taken  up  as  the 
chapter  progresses. 

Purchasing  for  the  Retailer.  Good  selling  is  predicated 
upon  skilful  buying;  practically  all  of  the  purchase  forms  and 
machinery  which  were  outlined  in  Chapter  V  can  be  used  by  the 
retailer — but  with  discriminating  changes.  The  doctrine  of 
maximum  and  minimum  stocks  can  be  employed  to  great 
advantage,  but  a  wide  range  of  discretion  must  be  exercised  in 
fixing  the  amounts.  In  the  staple  articles  the  determinations 
are  not  difficult,  but  in  the  purchasing  and  maintenance  of 
stocks  of  seasonal  articles,  the  real  ability  of  the  merchant 
comes  into  play. 

A  shortage  report  in  a  form  similar  to  that  used  in  a  manu- 
facturing store  room  may  be  sent  to  the  purchasing  department 
by  the  stockkeepers  for  all  of  the  staple  lines;  but  since  the 
buyer  is  providing  for  a  public  instead  of  for  a  series  of  man- 
ufacturing processes,  he  will  not  confine  himself  only  to  the 
replacement  of  the  goods  which  are  commonly  carried  in  the 
inventory,  but  will  constantly  seek  to  add  new  articles  and  to 
discard  obsolete  styles.  But  he  carries  many  staples  and  his 
records  and  files  should  contain  the  performance  records  and 
the  quotations  of  each  of  the  various  manufacturers  and  jobbers. 

All  goods  should  be  ordered  on  a  purchasing  form.  Any 
form  given  in  Chapter  V  may  be  varied  to  suit  the  especial  needs, 
observing  always  the  point  that  it  is  well  not  to  have  on  the 
copy  which  goes  to  the  receiving  clerk  any  clew  as  to  the  quantities 
ordered,  so  that  he  may  be  forced  to  an  independent  count. 
An  excellent  form  in  triplicate  (the  first  copy  going  to  the  seller 
and  constituting  his  authority  for  shipping  the  goods,  the  second 
copy — without  quantities — to  the  receiving  clerk,  and  the  third 
copy  for  filing  among  the  buyer's  records)  are  Forms  22-A  to 
22-E,  shown  in  Insert  II.  If  the  necessity  compels  a  verbal 
order,  it  should  be  confirmed  immediately  by  the  form. 

Immediately  upon  sending  out  an  order  form,  the  receiving 
clerk  should  be  given  a  copy,  which  he  will  file  as  his  permit  to 
receive  and  check  the  goods  when  they  arrive.  When  the  ship- 
ment comes  in,  the  receiving  clerk  makes  out  a  report  in  triplicate. 
Spaces  are  provided  on  this  form  for  the  numbers  or  initials  of 
the  particular  employees  who  open  and  check  the  goods.  The 
original  of  the  form  goes  to  the  buyer  and  he  adds  the  price  from 
the  invoice  which  has  already  been  given  to  him.    He  should  then 


290 


BUSINESS  ACCOUNTANCY 


examine  the  merchandise  to  ascertain  if  the  quality  is  in  accord- 
ance with  instructions  and  then  fill  in  the  selling  price.  The 
second  copy  goes  to  the  auditor  or  bookkeeper  who  is  thus 
notified  that  the  goods  are  on  hand  and  that  the  buyer  should, 
within  24  hours,  return  the  invoice  to  the  office. 

This  makes  the  notification  of  the  receipt  of  the  goods  auto- 
matic, and  if  the  invoice  is  not  turned  into  the  office  within  24 
hours,  an  investigation  can  immediately  be  started.  Without 
this  notification  the  office  would  be  required  daily  to  ask  what 
had  been  received,  for  otherwise  the  invoice  might  not  be  sent 
on  to  it  and  the  highly  important  discount  might  be  missed. 

On  the  buyer's  copy  should  be  posted  a  tag  (Form  93) 
showing  the  total  retail  price  of  the  lot  purchased  and  the  total 
anticipated  profits  or  " mark-up.' '  The  third  copy  remains  with 
the  receiving  clerk  as  his  tauthority.  If  any  of  the  goods  are 
returned,  a  report  in  triplicate  should  be  made  out — the  original 
going  back  with  the  shipment  to  the  seller,  the  duplicate  to  the 
buyer,  and  the  third  copy  bound  into  the  permanent  file  for  the 
receiving  clerk. 

The  office  having  received  a  report  from  the  buyer  has 
thereby  its  authority  to  mark  the  invoice  for  payment. 


INVOICE 

PASTER 

Total  Retail 

$ 

Total  Cost 

Anticipated  Profit 

$ 

1 

Form  93 

Of  course  all  of  this  formality  will  not  be  necessary  in  the 
very  small  establishment — but  whenever  a  particular  person 
takes  charge  of  purchasing  and  another  of  receiving,  adaptation 
of  the  records  can  well  be  used.  The  purchasing  records  are  of 
the  very  highest  value,  irrespective  of  the  size  or  character  of  the 


RETAIL  ACCOUNTING  291 

business.    One  must  have  the  facts  in  order  to  buy  intelligently. 

The  Charge  Register.  The  invoice  is  now  ready  to  be 
entered  upon  the  charge  register.  The  principle  of  the  charge 
register  has  already  been  explained  (Chapter  V).  Its  scope  in 
merchandising  is  greater  than  in  any  other  kind  of  business 
because  it  can  contain  more  of  the  charges — in  fact  it  can  hold 
nearly  all  of  the  charges  of  the  establishment.  A  good  retail 
form  is  shown  at  the  top  of  Insert  XIII.  It  contains  at  the 
left,  a  space  for  the  date  of  the  invoice,  the  name  of  the  creditor, 
the  amount  of  the  invoice,  and  the  column  marked  "paid"  in 
which  is  stamped  the  date  when  the  bill  is  paid.  The  other 
columns  distribute  the  charges  by  departments.  Each  depart- 
ment takes  four  columns.  The  first  is  entitled  "selling  price" 
or  "merchandise  at  retail"  and  in  it  the  gross  retail  price  at 
which  the  lot  is  expected  to  be  sold  is  entered.  The  next  column 
is  that  of  "mark-up"  or  "anticipated  profit."  The  selling  price 
minus  the  mark-up  is  the  amount  payable  on  the  invoice  and 
should  equal  the  amount  entered  in  the  first  column  of  the  register. 
The  lot  totals  of  selling  price  and  mark-up  have  already  been 
added  on  the  tag  attached  to  the  buyer 's  report. 

The  next  two  columns  take  the  expense  of  the  department, 
one  column  being  devoted  to  the  amount  and  the  second  to  a 
description  of  the  payment — that  is  the  account  for  which  the 
payment  was  made. 

The  width  of  the  charge  register  is  limited  only  by  the  number 
of  departments;  but,  for  convenience,  slip  sheets  should  be  used. 

To  illustrate  its  use :  Suppose  we  buy  a  lot  of  gloves  invoiced 
at  $100  which  we  expect  to  sell  at  $175.  We  should  enter  the 
$100  and  the  name  of  the  creditor  in  their  proper  columns, 
distribute  $175  to  the  selling  price  column,  and  $75  in  the  mark- 
up column.  A  check  on  the  accuracy  of  the  figures  is  had  by 
comparing  the  invoice  columns  with  the  total  of  the  selling  price 
columns  minus  the  total  of  the  mark-up  columns. 

Invoices  having  been  entered,  they  are  filed  in  the  maturity 
files,  and  any  one  of  the  various  procedures  for  payment,  the 
selection  of  voucher  checks,  and  the  like — as  explained  in 
Chapter  VI — may  then  be  utilized. 

Only  the  monthly  totals  are  posted  from  the  charge  register 
to  the  separate  le/dger  accounts,  which — as  previously  explained 
in  Chapter  V — is  one  of  the  great  time-saving  features  of  the 
charge  register. 


292  BUSINESS  ACCOUNTANCY 

The  separate  totals  of  the  two  items — the  selling  price  of 
the  goods  and  the  mark-up,  are  posted  to  separate  ledger  accounts 
under  the  same  names.  We  do  not  keep  individual  accounts  of 
what  is  owing  because  the  open  spaces  on  the  charge  register 
opposite  the  creditor's  name  in  the  "paid"  column  will  show  the 
unpaid  creditors. 

The  relation  of  the  mark-up  to  the  cost  of  goods  (the  amount 
we  credit  the  vendor)  gives  the  percentage  of  anticipated  profit 
on  the  cost,  and  the  percentage  of  the  mark-up  to  the  selling 
price  gives  the  anticipated  profit  on  sales.  These  may  be 
accumulated  by  departments  to  give  the  anticipated  profits  per 
department  and  afterward  compared  with  the  actual 
performances. 

I  have  had  the  buyer  mark  the  selling  price  on  the  goods 
apparently  without  any  relation  to  the  cost  of  doing  business  or 
to  any  other  factor.  I  do  this  because  such  is  the  way  it  works  out 
in  practice.  It  is  the  prevailing  prices  that  govern  in  retail 
merchandising  to  a  very  large  degree,  and  thus  the  cost  system 
might  to  some  extent  be  said  to  work  backward;  because,  instead 
of  fixing  the  selling  price  after  knowing  all  the  costs,  we  are 
compelled  to  fix  it  on  what  other  people  are  doing. 

We  shall  later  ascertain  through  the  records,  if  the  selling 
price,  all  things  considered,  is  a  profitable  one.  If  we  cannot 
sell  any  fine  at  a  profit  in  competition  with  other  merchants, 
then  the  fact  should  be  known.  Or,  again,  we  may  discover  that 
we  can  sell  at  a  price  less  than  that  which  generally  prevails  and 
thus  undersell  our  competitors. 

The  buyer  fixes  his  price  largely  with  relation  to  competitors; 
but  the  wise  buyer  takes  his  ultimate  selling  figures  all  the  way 
back  to  the  purchase  of  the  goods.  He  knows  the  percentage  he 
must  add  for  the  cost  of  doing  business;  and  thus,  before  pur- 
chasing, he  will  know  whether  the  price  quoted  to  him,  plus  his 
own  cost  of  doing  business,  will  permit  of  the  articles  being  sold 
at  prevailing  figures  and  still  return  a  satisfactory  profit. 

Goods  well  bought  are  half  sold,  and  here  many  matters  of 
merchandising  policy  and  practice  enter,  which  have  nothing  to 
do  with  accounting. 

The  receiving  clerk's  reports  are  bound.  If  goods  are  on  hand 
more  than  two  or  three  months,  or  whatever  term  within  which 
policy  dictates  that  they  should  be  sold,  the  executives  should 
trace  those  goods  back  through  the  receiving  clerk's  report  and 
gain  the  entire  history  of  their  purchase,  and  add  the  facts  thus 


RETAIL  ACCOUNTING  293 

obtained  to  the  records  of  the  buying  department.    Then  plans 
for  the  disposal  of  the  goods  should  be  formulated. 

Making  the  Sales  Records.  The  initial  record  of  a  sale  is 
the  sales  ticket  of  the  salesperson.  Many  forms  of  these  are  now 
used  and  the  best  form  is  merely  that  which  suits  the  trade. 
In  Chapter  VIII  the  handling  of  cash  sales  was  treated  and  the  use 
of  the  cash  register  instead  of  sales  tickets  was  discussed.  It  was 
there  recommended  that  if  the  exigencies  of  the  business  permit, 
that  some  kind  of  a  sales  ticket  be  used,  in  order  that  one  person 
could  be  made  responsible  for  the  handing  of  all  moneys;  but  the 
desirability  of  the  various  methods  will  depend  entirely  upon  the 
character  of  the  business.  A  great  number  of  small  sales — such 
as  in  a  5-  and  10-cent  store  or  at  a  bargain  counter — will  be 
handled  better  with  a  cash  register  than  with  a  sales  ticket. 
The  convenience  to  the  customer  must  also  be  borne  in  mind 
and  never  be  sacrificed  for  any  added  safety  in  the  handling  of  cash. 

I  know  of  a  considerable  number  of  stores  which  lost  business 
simply  because  they  installed  systems  of  taking  cash  which 
caused  long  waits  for  their  customers  after  purchase.  The 
accountant,  in  his  enthusiastic  search  for  the  perfect  method, 
will  sometimes  forget  that  stores  exist  to  sell  to  human  beings 
who  are  not  in  the  least  interested  in  the  conservation  of  the 
store  owner's  funds. 

A  common  form  of  sales  slip  (Form  95)  makes  a  carbon 
duplicate;  one  copy  goes  to  the  cashier  with  the  cash,  and  the 
other  is  wrapped  into  the  parcel.  The  sales  are  summarized  by 
the  employee,  either  on  a  stub  or  on  a  form  in  the  back  of  the 
sales  book.  By  totaling  the  sales  slips  at  the  end  of  the  day, 
the  departmental  sales  may  be  had  from  the  departments. 
The  slips  that  go  to  the  accounting  office  are  sorted  as  they 
arrive  and  at  the  end  of  the  day  they  also  are  totaled  by  depart- 
ments. Quite  frequently  a  rule  exists  that  the  employees  in  any 
department  may  not  leave  for  the  day  until  their  total  sales  are 
made  to  agree  with  the  totals  of  the  accounting  department. 
Thus  errors  are  disposed  of  at  once  while  they  are  fresh  in  mind. 

These  sales  slips  are  also  sometimes  so  arranged  that  they 
may  be  used  as  labels  upon  a  finished  package — in  which  case  it 
is  usually  found  desirable  not  to  have  the  price  paid  appear  on 
such  portion  as  acts  as  a  label.  This  is  merely  a  concession  to 
the  general  objection,  especially  among  women,  to  having  any- 
one know  how  much  they  paid  for  a  thing. 


SALES  TICKET 


Stamp  Here 


The  DOUD  DRY  GOODS  CO.,  Inc. 


327-9 


Department 


Clerk 


Inspector 


UAME. 


ADDRESS. 


Date 


Outside  Order 


How  Sold 


Total  Amount  Sale 


CHARGE  TO  M. 
ADDRESS 


PURCHASED  BY. 


327-9 


Department 


Clerk 


Stamp 


FORM  95:  A  sales  slip  similar  to  this  one  is  used 
by  many  retail  establishments.  It  allows  for  a 
carbon  copy  which  accompanies  the  purchase.  The 
original,  of  course,  goes  to  the  cashier.  The  sale3 
are  summarized  either  on  a  stub  or  in  the  back  of 
the  sales  book.     Totals  are  thus  easily  arrived  at. 


Accommodation 


Packages 


Here 


Date 


How  Sold 


Department 


Clerk 


Amount  Paid 


Amount  of  CO.  D. 


Stamp 


Amount  Received 
from  Customer 


Amount  of  Charge 


294 


Here 


RETAIL  ACCOUNTING  295 

Handling  Returns.  A  portion  of  the  goods — for  various 
reasons,  good  or  otherwise — will  be  returned,  either  by  requests 
to  have  the  goods  removed  by  the  driver,  or  by  the  purchaser 
bringing  them  back.  The  non-accounting  features  of  returns  and 
credits  are  matters  of  individual  policy.  The  return  evil  is 
expensive,  but  it  is  not  a  matter  to  be  disposed  of  purely  by 
figures — excluding  of  course  those  persons  who  use  the  privilege 
to  obtain  articles  for  temporary  employment  with  the  idea  of 
unfairly  turning  them  back  once  the  employment  has  ceased. 
Such  people  are,  of  course,  to  be  run  down.  But,  on  the  other 
hand,  it  is  impossible  to  determine,  except  in  individual  instances, 
whether  or  not  a  customer  does  not  buy  more  freely  at  a  store 
where  the  return  privilege  is  liberal  than  at  one  where  there  are 
no  returns;  and  whether  the  additional  sales  do  not  thereby 
balance  the  undoubted  loss  on  returns. 

Salespeople  should  not  be  permitted  to  grant  returns  or 
credits,  but  this  function  should  be  centralized  in  an  adjustment 
desk  or  with  a  department  manager,  with  the  thought,  however, 
in  mind,  that  the  returns  should  not  be  made  so  cumbersome 
that  ill  feeling  in  the  customer  will  be  engendered. 

Form  96  is  devised  to  take  care  of  the  returns  through  the 
delivery  department.  This  form  is  made  out  by  the  office  and  is 
handed  to  the  delivery  man  as  authority  to  fetch  the  goods. 
The  delivery  men  should  not  be  permitted  to  receive  goods 
without  an  order.  Form  97  provides  for  cash  refunds.  It  is 
formed  with  the  same  time-saving  features  that  we  used  in  the 
voucher  check.  The  original  is  an  order  on  the  cashier  to  pay. 
With  the  single  writing  is  also  made  a  receipt  from  the  cashier, 
while  the  third  copy  goes  through  to  the  sheet  which  is  retained 
in  the  adjustment  department  as  a  record  and  check  until  for- 
warded to  the  office.  The  arrangement  of  the  printed  matter 
is  such  that  a  single  writing  of  the  payee's  name  and  the  amount 
records  all  three  records. 

It  is  advisable,  in  all  store  records  which  must  be  posted  to 
the  ledger  or  of  which  further  note  must  be  made  by  the  account- 
ing department,  that  if  they  are  not  in  the  looseleaf  form,  two 
books  be  kept  alternating — one  book  always  being  in  use  by  the 
cashier,  adjustment  desk,  or  whatever  department  is  concerned, 
while  the  other  is  with  the  office  for  posting. 

Handling  Cash  Receipts  and  Disbursements.  The  sums 
disbursed  by  the  cashier  should  be  treated  as  explained  in 


RETURNED  GOODS  RECORD 


Date  Sold 

How  Sold 

Dollars 

Cents 

Received  Back 

Department 

Checked  in  Department  by 

FORM  96:     This  form  is  devised  to  take  care  of 
returned  goods  through  the  delivery  department. 
It  is  made  out  by  the  office  and  handed  to  the  de- 
livery man  as  authority  to  fetch  the  goods  without 
which  he  is  not  permitted  to  accept  any  returns. 
This  method  centralizes  the  granting  of  returns  for 
credits  in  an  adjustment  desk  or  with  a  department 
manager  and  also  eliminates  a  great  deal  of  clerical 
work  which  would  otherwise  be  necessary. 

Return  Approved  by 


The  DOUD  DRY  GOODS  CO.,  Inc. 

Bridgeport,  Conn. 


No_ 


M, 


Please  deliver  to  bearer  goods  to  be  returned  to  this  Company 

for  Credit. 

This  slip  will  be  your  Receipt. 

TheDOUD  DRY  GOODS  CO.,  Inc. 


296 


- 


- 


> 


INSERT  XIII 

FORMS  94  and  98,  described  on  pages  291  and  297 


- 


MERCHANDISE  AND  EXPENSE  REGISTER 

Page 

Dale 

Creditor 

Credit 

Accounts 
Payahle 

Paid 

Department 

Debit         Credit 

Mer-          Antic- 

chandise       ipated 

at  Retail        Profit 

Debit  Expense 

Debit           Credit 

Mer-           Antic 

chandise        ipated 

at  Retail         Profit 

Debit  Expense 

Amount 

Account 

Amount 

Account 

3 

A 
5 

FORM  94:    The  scope  oi  a  charge   register   such   as 
this  is  greater  in  the  merchandising  business  than  in 
any  other,  because  it  contains  more  of  the   charges. 
In  fact  it  can  hold  nea-ly   all  of  the   charges  of  an 
establishment.     The  operation   of  such   a    register   is 
quite  simple  and  fully  explained  in  Chapter  V. 

1 

1 1 — 1 1 n- — ' 

44 

45 

46 

47 

48 

49 

SO 

MERCHANDISE  AND  EXPENSE   REGISTER 

Department                     "G" 

Department                    "H" 

Department                     "I" 

Adm.andGen.Exp. 

Sundries 

Debit 
Mer- 
chandise 
at  Retail 

Credit 
Antic- 
ipated 
Profit 

Debit  Expense 

Debit 
Mer- 
chandise 
at  Retail 

Credit  j|    Debit  Expense 

Debit 

chandise 
at  Retail 

Credit 
Antic- 
ipated 
Profit 

Debit  Expense 

Amount 

Account 

Account 

Folio 

Amount 

Account 

ipated 
Profit 

Amount 

Account 

Amount 

Account 

n 

1 -~- 

1 — r~ 

DAILY  SALES  REGISTER 

Month  of                            191 

Company  Total 

Department                      "A" 

Department                      "B" 

Department                     "C" 

Credit 
Cash 
Sales 

Credit 
Charge 
Sales 

Credit! 
C.  0.  D. 
Sales 

Debit  Antic- 
ipated Profit 
Adjustments 

Credit 
Cash 
Sales 

Credit 
Charge 
Sales 

Credit 
C.  0.  D. 
Sales 

Debit  Antic- 
ipated Profit 
Adjustments 

Credit 
Cash 
Sales 

Credit 
Charge 
Sales 

Credit 
C.  0.  D. 
Sales 

Debit  Antic- 
ipated Profit 
Adjustments 

Credit 
Cash 

Sales 

Credit 
Charge 
Sales 

Credit 

C.  0.  D. 

Sales 

Debit  Antic- 
ipated Profit 

Adjustments 

1 

2 

3 

4 

5 

6 

7 

23 

26 

a 

DAILY  SALES  REGISTER 

Month  of                                    191 

Department                     "F" 

Department                      "G" 

Department                      "H" 

Department                     "I"  || 

Credit 
Cash 

Credit 
Charge 

Credit 
C.  0.  D. 

Debit  Antic- 
ipated Profit 

Credit 
Cash 

Credit 
Charge 

Credit 
C.  0.  D. 

Debit  Antic- 
ipated Profit 

Credit 
Cash 
Sales 

Credit 
Charge 
Sales 

Credit 

C.  0.  D. 

Sales 

Debit  Antic- 
ipated Profit 

Adjustments 

Credit 

Cash 
Sales 

Credit 
Charge 
Sales 

Credit 

C.  0.  D. 

Sales 

Debit  Antic- 
ipated Profit  l 
Adjustments 1 

2 

3 

J 

FORM  98:     It  is  essential  to  the  successful  manage- 
ment of  any  retail  business  that  the  performance  of 
every  department  may  be  easily  arrived  at.     A  form 
such  as  this,  of  which  the  portion  opposite  is  a  part, 
serves  this   purpose    very   effectively   and   will   prove 
an   excellent    control  sheet   for    the  sales  manager  as 
it  will  show   at   a   glance  just    where   the   sales  have 
been    good   and   where  they  have  fallen  down. 

5 

6 

' — 

7 

25 

26 

l 1 — n 1 — I 

27 

26 

29 

30 

31 

D 


RETAIL  ACCOUNTING 


297 


Chapter  VI,  and  his  outlays  should  be  limited  to  amounts  which 
cannot  easily  be  carried  through  the  general  payment  scheme. 
The  cash  receipts  book  will  follow  the  same  lines  as  the  book 
of  similar  title  detailed  on  page  133,  Chapter  VIII,  except  that  in 
retail  merchandising  we  divide  into  cash  sales,  credit  sales,  and 
c.  o.  d.  sales.  The  c.  o.  d.  sales  are  charged  temporarily  to  the 
delivery  agent.  Goods  should  never  be  sold  on  memorandum 
and  no  provision  has  been  made  for  such  sales.  When  goods  are 
sent  on  approval  they  should  be  charged  as  a  regular  sale  and  the 
customer  given  a  credit  when  they  are  returned. 


Form  97 


Gathering  Daily  Sales  Totals.  The  performance  of  each 
department  is  gathered  daily  into  a  highly  important  form 
known  as  the  daily  sales  register.  This  is  divided  departmen- 
tally,  and  the  departmental  sales  are  subdivided  into  cash, 
charge,  and  c.  o.  d.  Form  98  shown  on  the  lower  half  of  Insert 
XIII,  gives  the  performances  by  departments.  A  further  line  of 
information  on  the  salespeople  within  the  departments  may  be 
compiled  on  Form  99,  which  is  helpful  in  rating  individual 
ability,  and  will  permit  wages  to  be  based  upon  performance. 

Marking  Up  and  Marking  Down.  The  goods  have  been 
carried  at  the  selling  price.    If  they  do  not  move  quickly  enough 


298 


BUSINESS  ACCOUNTANCY 


we  have  hinted  that  the  price  should  be  marked  down.  In 
other  cases — a  very  rare  occurrence — the  goods  are  marked  up. 
If  these  changes  in  price  are  not  somehow  taken  into  account  in 
our  invent  ory,  which  is  kept  at  the  selling  price,  it  will  either  be 
too  high  or  too  low.  Therefore  a  "mark-down"  or  "change" 
report,  shown  in  Form  100,  should  be  made  whenever  a  depart- 
ment head,  or  whoever  has  the  authority,  decides  to  alter  prices. 


INDIVIDUAL  SALES  RECORD 

DEPARTMENT                                                  MONTH  OF                                              191_ 
SALESPERSON'S  NAMF                                                                      NUMRFR 

r»o*«  I!      Cash 
Date!      Sales 

Charge 
Sales 

C.  0.  D.  jj      Cash 
Sales         Credits 

Charge 
Credits 

C.  0.  D. 

Credits 

Net 

Sales 

i   1! 

■ 

2    | 

3 

4 

5 

6 

7 

30 

31 

Fonn< 

)9 

Entering  Charge  Accounts.  The  charge  accounts  of  cus- 
tomers, if  not  numerous,  may  be  handled  as  already  explained 
in  Chapter  VII,  page  114,  but  a  more  labor-saving  method,  and 
nearly  the  only  method  in  large  stores,  is  to  post  directly  from 
day  to  day  from  the  sales  slips  to  the  customer's  bill.  The  first 
carbon  of  the  bill  provides  the  store  record,  and  at  the  end  of 
the  month  the  originals  are  taken  out,  totaled,  and  mailed. 

Sometimes  the  total  is  carried  forward  with  each  day's  pur- 
chase^— which  is  a  method  even  more  labor  saving.  If  an  out- 
look envelop  is  used,  no  further  clerical  work  is  required.  The 
monthly  totals  only  are  posted  to  the  ledger.  As  the  customers 
pay  their  bills,  the  carbons  of  their  statements  are  removed  from 
the  file,  and  thus  at  the  end  of  the  month  the  bills  remaining  in 
file  are  only  those  past  due.  In  very  large  stores  these  bills  are 
divided  among  a  number  of  clerks — each  clerk  being  given  charge 
of  certain  letters  of  the  alphabet.  A  form  of  statement  is  shown 
in  Form  101. 


RETAIL  ACCOUNTING 


299 


Distributing  Expense.  The  distribution  of  the  burden 
or  overhead  does  not  offer  the  difficulties  which  we  encountered 
in  manufacturing,  because  the  proportion  of  indirect  to  direct 
expense  is  comparatively  slight. 

All  of  the  direct  expenses  go  to  the  department  from  the 
charge  register,  and  most  other  amounts  can  likewise  be  entered. 
For  instance,  take  advertising.  The  advertising  manager  esti- 
mates the  value  of  all  advertising  space  by  square  inches,  the 
different  positions  in  the  copy  and  in  the  publications  being 
arranged  in  a  scale  of  values.  The  department  whose  goods  are 
advertised  is  charged  directly  with  its  advertising  according  to 
the  scale.  The  same  methods  are  followed  with  the  window 
space  and  bargain  counters.    The  fixed  charges  are  apportioned 


CHANGE  SLIP 

np.PAPTMTTMT                                                                                                                                                                                             101 

Line 
No. 

Description 

Quantity 

From 

To 

Difference 

Amount 

Authorized 
by 

Reason 

-— ~___ 





~ 

Forn 

■j  100  1                            Report  damages  and  broken  goods  on  this  form,  giving  reason 

on  the  square  feet  occupied  by  the  windows  and  the  counters. 
The  windows  and  counters  thus  have  definite  carrying  charges 
accumulated  on  a  monthly  basis.  By  dividing  the  number  of 
hours  in  the  month  into  this  total,  we  have  the  rental  for  windows 
or  counters.  The  department  using  the  window  or  counter  is 
charged  with  this  rental.  In  some  stores  the  spaces  are  auctioned 
to  the  buyers. 

Apportioning  the  Fixed  Charges.  The  fixed  charges  of 
the  establishment  are  accumulated  as  was  described  in  Chapter 
XX,  page  272 ;  then  the  total  is  apportioned  on  a  square  foot 
basis  and  each  department  receives  an  overhead  charge  accord- 
ing to  the  number  of  square  feet  and  the  location  it  occupies. 

The  administrative  and  general  expense — with  the  exception 
of  deliveries,  which  will  be  treated  separately — is  accumulated, 
and  although  it  may  be,  it  is  seldom  worth  while  to  distribute  it 


300 


BUSINESS  ACCOUNTANCY 


by  departments.  Instead  the  total  of  these  expenses  is  taken 
and  compared  with  the  total  mark-up  of  the  same  term;  the 
percentage  thus  derived  is  the  total  percentage  to  be  added  to 
the  mark-up  for  this  section  of  the  overhead. 

Charging  Deliveries  into  Expense.  The  delivery  expense 
is  often  a  very  heavy  one,  and  the  modern  effort  is  to  make  the 
charge  directly  to  the  departments.  In  the  case  of  furniture,  and 
often  in  the  case  of  jewelry,  separate  deliveries  are  maintained 
and  the  expense  is  carried  directly  to  the  department.  Other- 
wise bulk  determines  the  distribution.  The  delivery  depart- 
ment maintains  a  tally  sheet  of  the  goods  from  each  department, 


Form  101 J 


and  on  this  tally  sheet  are  marked  classes.  The  classes  act  as 
units  and  are  determined  by  bulk,  expense  of  packing,  and  so 
forth.  The  number  of  units  shipped  during  the  month,  divided 
into  the  total  expense  of  delivery,  gives  the  cost  per  unit.  The 
number  of  units  contributed  by  any  department,  multiplied  by 
the  unit  cost,  gives  the  delivery  charge  for  that  month. 

Determining  Departmental  Expense.  The  expenses  of 
each  department  are  covered  upon  the  same  form  of  expense 
analysis  as  already  given  in  Chapter  XIX,  and  with  the  same  com- 


RETAIL  ACCOUNTING 


301 


parison  by  month  and  by  period.  The  items  upon  the  analysis 
will,  of  course,  vary.  Most  departments  will  be  covered  by  at 
least  the  items  shown  in  Form  102. 

The  expense  analysis  may,  if  desired,  be  divided,  as  has  been 
previously  shown  under  manufacturing  expense,  into  controllable 
and  uncontrollable,  and  the  totals  then  compared  with  the  total 
sales  of  the  department,  which  will  give  a  percentage  to  be 
added  to  sales  and  which  represents  the  overhead  of  that 
department. 

Handling  General  Bookkeeping.  The  bookkeeping  of 
retail  merchandising  with  the  exceptions  already  noted,  follows 
entirely  the  lines  that  have  been  developed  in  the  previous  chap- 


EXPENSE  ANALYSIS 

DEPARTMENT 

Month  of                                              191 

Month  of                                                     191 

Current 
Month 

Previous 
Year 

This  Year 
to  Date 

Last  Year 
to  Date 

Current 
Month 

Previous 
Year 

This  Year 
to  Date 

Last  Year 
to  Date 

Salaries 

Commissions 

Allowances 

Express   and  Treight 

Repairs  and  Alterations 

Traveling  Expense 

Delivery 

3peoial  Advertising 

Postage 

Newspaper  Advertising 

Labels,    and  so   forth 

Boxes 

Breakage 

Demonstration 

Incidentals 

General   Expense 

Ciroular  Advertising 

Rent 

Light 

Taxes 

Insurance 

Depreciation 

And 

BO 

forth 

T6TAL 

SALES 

%  Expense  to  Sales 

1                         1 

Form  102 1 

ters,  insofar  as  the  ledger  and  other  accounts  are  concerned. 
The  books  are  closed  and  the  trial  balance  taken  off  in  exactly 
the  same  manner — although  as  a  matter  of  fact  the  books  are 
seldom  actually  closed — and  the  statement  of  condition  follows 
the  previous  lines. 

That  which  corresponds  to  the  statement  of  operations  of 
a  manufacturing  corporation  should  be  taken  off  monthly  by 
departments.  A  form  is  given  in  Form  103  which  is  practically 
self -explanatory. 


MONTHLY  DEPARTMENTAL  PROFIT  AND  LOSS  REPORT 

DEPARTMENT                                                                                                                             \ 

Month  of                                                     191 

Month  of  [ 

191 

Current    fi  Previous  jj  This  Year 
Month    |      Year     jj    to  Date 

Last  Year 
to  Date 

Current 
Month 

3  Last  Year 
\    to  Date 

■ 
• 

OS 

Stock  first  of  month 

Purchases 

Total 

Less  mark-downs 

! 

Net  value   -  Retail 

, 

*> 
c 
o 
o 

V 

sc 

a 
♦J 
c 
t> 
o 
t. 

4> 

a. 

■ 

H 

a 
■j-. 

o 
o 
«J 

CD 

Stock  first  of  month  -  Cost 

Purchases 

Total  Cost  Value 

I 

, 

Amount  of  mark-up 

%  mark-up   to   Sale  Price 

%  mark-up  to   Cost 

%  Cost  to   Sale  Price 

1 

, 

Sales  for  month 

Cost   of   same 

' 

Increase  over  last  year 

Percentage  of   Increase 

Stock!    end  of  month   -  Retail 

J 

Stock,    end  of  month,    -  Cost       1 

J 

Decrease  per  month   -  Cost 

I   | 

Decrease  from  last  year 

Gross  Profit 

FORM    103:      A   report   in    this 
form  from  each  department  of  a 
business  at  the  end  of  the  month 
will  give  the  owner  or  executive 
an  exact  knowledge  of  the  prog- 
ress of  his  business.     It  is  a  con- 
trol sheet  that  offers  many  oppor- 
tunities for   uncovering  mistakes 
and    discovering    improvements. 

Percentage  of  Profit  on  Sales 

Expense    (see   analysis) 

Percentage   -  Expense   to   Sales 

Net  Profit 

Percentage  -  Net  Profit  to  Sales 

:  l 

' 

Average  stock  for  year 

, 

Turnover  on  average   stock 

! 

Inventory,   end  of  month 

Difference 

| 

1 

1 

! 

302 


RETAIL  ACCOUNTING 


303 


A  valuable  item  is  the  entry  of  the  amount  of  the  average 
stock  of  the  year  in  order  to  compare  the  stock  in  the  report 
with  the  average,  and  also  the  rate  of  turnover  on  the  average 
stock.  If  a  physical  inventory  has  been  taken,  the  figures  of 
this  inventory  are  compared  with  the  inventory  from  the  books 
and  the  difference  noted.  A  report  in  this  form  gathered  by 
departments  at  the  end  of  each  month  will  give  the  owner  or 
executive  an  exact  knowledge  of  the  progress  of  his  business, 
and,  therefore,  how  he  can  better  it. 

A  detailed  report,  as  given  in  Form  104,  is  also  advised.  This 
is  a  summary  by  departments,  and  gives  the  sales  for  the  day, 
same  day  of  last  week,  and  the  same  day  of  last  year.  The 
letters  F,  C,  S,  R,  show  the  weather  on  each  of  these  days — for 
any  retail  merchandising  comparisons  which  do  not  take  into 
account  the  state  of  the  weather  are  of  small  help.  The  total 
sales  are  thus  summarized  and  also  the  stock  on  hand.  Below 
is  the  bank  balance,  the  accounts  receivable  and  the  accounts 
payable.  This  report  keeps  the  finger  of  the  executive  always 
on  the  pulse  of  the  business. 


DAILY  SALES  REPORT 

1Q1 

De- 
part- 
ment 

COMPARISON  OF  DAYS'  SALES 

Adver- 
tising 

TOTAL  SALES  SINCE  JAN.  1 

STOCK  ON  HAND  AT  RETAIL 

f|c|s|r||f|c|s|r 

f|c|s|r 

191 

191 

One 
Year  Ago 

This 
Date 

One 
Week  Ago 

One 
Year  Ago 

This 
Date 

A 

B 

C 

D 

F 

I 

Totals 

Bank  Balance 
$ 

Accounts  Receivable 
$ 

Accounts  Payable 
$ 

Form 

1( 

)4|' 

if-.  Fair 

C" 

•  Clo 

udy                           "S" 

•  Snow 

•R"-Rain 

Shall  We  Include  Interest  on  Investment?  A  consider- 
able number  of  retail  houses  charge  interest  upon  their  invest- 
ment. This  phase  of  accounting  was  fully  discussed  in  general 
on  page  244,  and  the  conclusion  was  there  reached  that  interest 
on  one's  own  money  invested  in  one's  own  business  is  not  a 
proper  charge  because  it  is  confusing  a  banker's  profit  with  a 
business  profit. 


304  BUSINESS  ACCOUNTANCY 

In  some  retail  lines,  for  instance  in  the  jewelry  trade,  the 
interest  is  a  very  serious  item.  In  fact  many  jewelers  realize 
only  a  banking  interest  upon  their  investment;  there  are  numer- 
ous other  lines  where  the  rate  of  turnover  is  very  low  indeed 
because  the  stock  is  extremely  expensive  and  the  sales  are  infre- 
quent and  usually  of  high  unit  values.  This  would  seem  to  be 
a  case  for  the  addition  of  interest. 

The  difficulty  with  the  addition  of  interest  to  the  cost  of  stock 
is  basic.  It  is  glibly  said  that  money  must  be  taken  as  always 
earning  at  least  a  banking  profit,  and  that  the  merchandising 
profit  does  not  begin  until  the  banking  profit  has  been  withdrawn. 
Such,  however,  is  not  the  case;  money  invested  in  business  is 
merged  in  the  business,  and  the  matter  of  interest  is  not  to  be 
considered  except  in  special  cases  where  the  money  is  placed 
with  a  business  in  some  role  between  a  share  and  a  loan.  The 
same  theory  applies  to  the  owner  taking  out  a  salary  for  him- 
self other  than  the  salary  which  he  might  be  compelled  to  pay 
to  a  clerk  whom  he  replaces.  The  choice  has  been  made  between 
a  banking  and  a  mercantile  adventure  and  should  be  adhered  to. 

Slow-moving  stocks  of  considerable  value  will  accumulate 
much  additional  cost  if  interest  be  added  from  month  to  month, 
and  the  price  at  which  they  may  be  sold  becomes  so  large  that 
the  drastic  cuts  necessary  to  move  them  are  delayed.  Stock 
may  thus  take  on  a  prohibitive  cost  value  and  require  a  selling 
price  which  is  far  above  the  market — a  high  price  which  puts 
you  at  a  disadvantage  with  your  competitor  who  may  not 
charge  interest  or  who  may  have  just  bought  his  goods. 

The  interest  that  you  add  is  profit,  and  it  is  not  to  be  dis- 
guised under  any  other  form;  money  is  not  worth  any  fixed 
sum — it  is  worth  what  it  brings  in  the  employment  to  which 
you  put  it.  If  you  have  chosen  merchandising,  it  is  worth  what 
it  there  earns  and  no  more.  To  consider  your  money  as  both 
safely  invested  in  government  securities  and  also  employed  in 
your  trade  is  absurd.  The  energy  sometimes  devoted  to  add- 
ing interest  to  investment  had  better  be  devoted  to  quickening 
turnover.  When  goods  do  not  sell,  make  up  your  mind  that 
you  have  made  a  mistake  in  buying,  and  that  a  loss  is  ahead; 
you  will  encounter  the  loss  anyway,  and  it  only  seems  worse 
if  you  make  the  face  amount  larger  by  the  addition  of  interest. 


CHAPTER  XXin 

ACCOUNTING  FOR  THE  JOBBER 

THE  jobber  buys  finished  goods  and  resells  them  to  the 
retailer  or — if  he  handles  a  product  which  later  enters 
into  some  process  of  fabrication — to  the  manufacturer  or 
installer.  His  function  is  different  from  that  of  the  broker  who 
does  not  take  title  and  merely  acts  as  a  go-between.  The  jobber 
actually  buys,  and  one  of  the  most  important  divisions  of  his 
business  is  purchasing  when  prices  are  low  and  selling  when 
they  advance.  In  this  way  he  employs  his  capital  to  form  a 
kind  of  trade  reservoir  to  take  the  surplus  from  the  manufacturer 
and  dole  it  out  in  smaller  lots  to  the  next  intermediate  consumer. 
He  seldom  has  dealings  with  ultimate  consumers.  Had  he  such 
dealings  it  would  probably  be  improper  to  term  him  a  jobber. 
In  actual  practice,  jobbing  is  often  intermixed  with  brokerage, 
sales  agency,  or  retailing.  Properly,  however,  he  is  merely  a 
distributor.  He  buys  at  the  source  and  in  larger  lots  than  it 
would  be  profitable  or  feasible  for  his  customer  to  purchase  and 
he  then  sells  in  the  amounts  which  his  trade  demands.  His 
particular  employment  is  then  one  of  capital. 

In  many  commodities  the  jobber  has  an  important  part; 
in  others,  he  is  rapidly  passing  out  and  the  manufacturers  are 
dealing  directly  with  the  trade.  Another  assumed  role  of  the 
jobber — and  one  reason  for  his  strong,  indispensable  position 
in  some  lines — is  that  he  acts  as  a  kind  of  banker  for  smaller 
men;  because  of  his  more  intimate  knowledge  of  his  customers 
he  is  able  to  extend  lines  of  credit  which  would  be  out  of  the 
question  in  the  case  of  a  national  manufacturer. 

The  Principal  Jobbing  Expenses.  The  jobber  does  not 
change  the  form  of  the  goods  which  he  buys  and  therefore  his 
purchases,  whether  of  raw  or  of  finished  products,  are  simply 
bought  at  one  price  and  sold  at  another  with  no  expense  of 
manufacturing.  His  only  expenses  are  the  upkeep  of  his  build- 
ings   warehouses,  fixtures,  administration    and    office  charges, 

305 


306  BUSINESS  ACCOUNTANCY 

salesmen  with  their  traveling  expenses,  salaries  and  commis- 
sions, packing  and  delivery.  These  are  precisely  the  expenses 
of  the  selling  side  of  a  manufacturing  business.  The  book- 
keeping and  cost  accounting  of  the  jobber  are  exactly  those 
already  given  in  connection  with  selling  by  manufacturers. 

The  principal  expenses  are  those  for  salesmen  and  delivery. 

Salesmen  should  be  rated  according  to  the  profits  which  they 
turn  over  and  also  by  zones  in  order  that  the  whole  selling  field 
may  be  analyzed. 

It  is  highly  important  to  form  a  delivery  system — if  wagons 
or  trucks  are  used — along  the  lines  given  on  page  300  for  retailing 
merchants.  The  circumstances  are  identical.  Deliveries  should 
be  apportioned  and  charged  according  to  lines  and  selling 
districts  in  the  manner  which  has  previously  been  pointed  out. 

Although  the  bookkeeping  and  the  cost  accounting  of  jobbing 
are  quite  simple,  nevertheless  they  are  of  high  importance 
because  the  margin  of  profit  on  a  specific  sale  is  commonly  small 
and  the  fair  aggregate  profit  is  gained  by  an  exceedingly  high 
rate  of  turnover. 

All  the  pomts  in  jobbing  which  have  just  been  treated  appear 
at  length  in  various  portions  of  this  volume  and  it  is  recommended 
that  such  of  these  principles  as  are  applicable  be  studied  in  their 
relation  to  the  improvement  of  the  methods  in  a  jobbing  business. 
The  procedures  are  not  complex,  but  the  opportunity  for  com- 
parisons and  checks  is  no  less  great  and  of  no  less  importance 
than  in  the  other  divisions  of  business. 


CHAPTER  XXIV 

CONTROL  REPORTS  FOR  THE  EXECUTIVE 

THE  reports  which  an  executive  should  have  in  order 
properly  to  keep  track  of  his  business  depend  upon  the 
exact  position  which  the  executive  occupies  in  his  organi- 
zation—that is,  how  closely  he  supervises  detail  and  to  what 
extent  he  is  familiar  with  the  routine  of  his  business. 

The  owner  of  a  single  factory  of  very  moderate  size  would 
do  well  to  examine  practically  all  of  the  reports  which  have 
been  mentioned  in  previous  chapters.  But  the  head  of  a  great 
corporation  with  plants,  stores,  or  branches  all  over  the  country 
would  be  swamped  by  so  much  detail.  On  any  individual  case 
the  executive  may  be  guided  by  his  past  experience;  for  instance, 
the  man  who  has  come  up  through  the  manufacturing  side  will 
probably  think  primarily  of  factory  reports,  while  the  salesman 
on  the  contrary  will  still  look  upon  the  summarizing  of  selling 
as  the  most  important  thing  in  his  business. 

The  point  is  that  the  individual  preferences  should  be 
tempered  and  reports  should  be  received  by  any  executive 
which  cover — however  broadly — the  entire  range  of  the  business, 
whether  it  be  manufacturing,  manufacturing  and  selling,  mer- 
chandising, or  any  other  variety  of  enterprise. 

From  time  to  time  in  this  volume,  examples  of  proper  and 
instructive  reports  have  been  given.  The  minimum  of  reports 
for  any  executive  are  those  of  the  final  results  over  a  period, 
compared  with  preceding  periods,  a  statement  of  condition, 
and  a  statement  of  operation,  the  latter  in  detail  such  as  was 
exhibited  on  page  202.  He  should  want  to  know  the  profit  and 
the  sales  in  each  division  of  the  business  as  well  as  upon  the 
enterprise  as  a  whole.  Then  if  the  results  do  not  come  up  to 
his  expectations  he  can  call  for  further  and  more  detailed  reports 
such  as  for  instance  were  given  in  Chapter  XVIII.  It  would 
also  be  helpful  for  the  executive  to  have  before  him  a  summary 
of  the  expense  analysis. 

307 


308  BUSINESS  ACCOUNTANCY 

As  we  come  down  the  line — that  is,  as  we  come  closer  to  the 
actual  transactions — the  executive  will  require  an  increasingly 
larger  number  of  reports  because,  if  he  is  close  to  the  detail  of 
the  business,  it  will  be  necessary  for  him  to  have  detailed  reports. 
The  importance  of  periodical  reports  cannot  be  overestimated. 

The  department  store  head  should  have  the  daily  summaries 
given  in  Chapter  XXII  while  the  owner  of  even  the  smallest  kind 
of  a  retail  store  should  compile  for  himself  a  weekly  or  at  least 
a  monthly  report  upon  the  same  lines. 

No  business,  whatever  its  character  or  size,  is  too  large  or 
too  small  to  be  checked  periodically,  and  the  results  over  that 
period  compared  with  the  results  of  a  former  period.  Without 
the  comparisons,  the  possibility  for  the  improvements  which 
make  for  added  profits  and  detailed  business  methods  will  not 
be  realized.  Most  disastrous  failures  and  all  gradual,  seeping, 
failures — that  is,  failures  by  what  might  be  called  attrition — 
would  be  prevented  by  proper  periodical  comparisons. 

The  Graphic  Representations  of  Accounts.  Sometimes 
graphs  of  accounts  aid  an  executive.  The  importance  of  the  aid 
depends  largely  on  whether  the  individual's  mind  best  grasps 
figures  or  merely  the  relations  of  figures.  In  the  latter  case  the 
pictures  afforded  by  the  graphs  are  most  instructive. 

Practically  everything  in  accountancy  may  be  reduced  to 
the  graph  form;  for  instance  the  relation  of  indirect  to  direct 
labor,  the  relation  of  selling  expense  to  sales,  and  so  on  through 
the  entire  list  of  important  relations.  Or  again  the  gross  sales, 
the  net  sales,  the  surplus  account,  the  bad  debt  account,  or  any 
other  account  of  recurring  totals,  can  be  plotted  by  dividing  a 
sheet  of  paper  longitudinally  into  groups  of  dollars  and  vertically 
into  periods. 

Graphs  are  striking  and,  if  the  relations  cannot  otherwise 
be  comprehended,  should  be  used.  They  are  especially  helpful 
in  talks  to  employees.  But  I  do  not  recommend  them  for  other 
than  dramatic  purposes.  Their  fatal  defect  is  that  they  do  not 
give  the  reasons. 

When  Symbols  Can  Be  Used.  In  using  the  charge 
register,  one  is  continually  distributing,  possibly  a  large  number 
of  items,  to  many  departments,  and  quite  frequently  the 
descriptions  which  it  is  necessary  to  annex  to  the  charges  are  too 
voluminous  for  the  space  available  in  the  register  columns. 
Then  symbols  are  invoked. 


EXECUTIVE  REPORTS  309 

Before  making  a  system  of  symbols,  go  over  the  expenditures 
of  several  years  and  form  a  list  of  the  various  articles  which 
have  been  purchased.  Give  each  of  these  articles  a  number  and 
then  letter  the  departments  of  the  business.  Thus  we  have  a 
department  letter  to  designate  the  section  to  which  the  charge 
is  to  go  and  a  number  to  denote  the  article  purchased.  Suppose 
we  buy  rubber  gloves.  Say  that  our  symbol  for  rubber  gloves  is 
5.  They  have  been  bought  for  department  A.  Therefore,  we 
enter  in  the  charge  register  merely  A  5,  and  this  symbolization 
is  carried  throughout  the  bookkeeping. 

Symbols  are  in  a  degree  time  saving,  but  they  can  easily  be 
overdone  and  too  elaborate  a  system  be  constructed.  Their 
chief  difficulty  is  that  without  an  index  the  books  are  absolutely 
unintelligible;  another  difficulty  of  moment  is  that  if  articles  are 
carried  entirely  by  their  symbols,  the  charges  may  easily  be  made 
to  a  wrong  department  and  the  error  never  discovered.  This  is 
upsetting  to  the  general  system. 

In  executive  reports  and  in  all  accounting  short  cuts,  the 
thought  should  be  to  use  those  things  which  are  convenient  and 
time  saving,  but  to  use  them  as  conveniences  and  not  as  part  of 
a  rigid  system.  It  is  so  very  easy  to  become  enthusiastic  in  any 
of  these  matters,  that  I  feel  that  I  should  constantly  caution 
against  riding  away  on  bookkeeping  hobbies. 


INDEX 


ACCOUNTING 

-  basic  principles  of  8 

-  basis  of  1 

-  charge  register  72  to  79 
-cost 

-  fitting  into  the  business  ac- 

counts 273 

-  what  it  is  210,  273 

-  definition  of  1 

-  for  the  man  who  sells  service 

-  handling    dull    and    rush 

seasons  283 

-  job  cards  281 

-  labor  281 

-  office  burden  282 

-  overhead  281 

-  pay  roll  281 

-  summarizing  the 

charges  283, 284 

-  traveling  expenses  281 

-  function  of  3,  10 

-  how  it  differs  from  bookkeeping      1 
'  how  it  affects  profits  10 

-  jobbing 

-  delivery  system  306 

-  expense    "  305,  306 

-  one   lumber   operator's   foolish 

system  1 

-  retail 

-  basis  of  costs  285,  286 

-  books  to  keep  288 

-  by  departments  286 

-  cash  receipts  295,  297 

-  charge  accounts  298 

-  charge  register  291,  292 

-  daily  sales  register  297,  303 

-  deliveries  300 

-  departmental  expense    300,  301 

-  distinguished    from  manu- 

facturing 285 

-  expense  analysis  301 

-  fixed  charges  299 

-  interest  on  investment  303,  304 
-marking   up   and   marking 

down  297, 298 

-  overhead  299 

-  profit  and  loss  report  302 

-  returns,  how  to  handle  295,  296 

-  sales  records  293,  294 
-turnover,   reasons  for  fre- 
quent 287 

-  sales  102  to  125 

-  the  X-ray  of  business  24 


-  universality  of  principles  143 

-  what  it  is  3 

-  what  it  should  include  27 

-  what  it  showed  one  company  21 


ACCOUNTS  PAYABLE 


-  account  (ledger) 

-  cash  discounts 

-  check  protection 

-  invoice 

-  maturity  file 

-  methods  of  payment 

-  payroll 

-  petty  cash  payments 

-  recording  payments 

-  special  voucher  check  forms 

-  two  classes 


82,  100,  123,  139 

84 

89 

83 

84,85 

85 

91  to  97 

89,90 

95  to  97 

88 

83 


-  voucher  checks  85  to  89 

-  (see  also  Statement  of  Condition) 

ACCOUNTS  RECEIVABLE 

-account  (ledger)  123,  138 

-  how  shown  in  the  statement  of 

condition  166 

-  in  suspense  167 
Accruals                                      171,  172 

ADVERTISING 

-  expense  270  to  272 

-  records  270  to  272 
Amortization  of  securities  163,  164 
Appreciation  199 

ASSETS 

-  deferred  168,  169 

-  fixed  159 
-goodwill  183  to  191 

-  quick  or  current  159 
-relation  between  quick  assets 

and  current  liabilities  75 

Audit,  value  of  competent  181 

Autograph  system  (see  Cash) 

B 

Balance  Bheet    (see   Statement  of 

Condition) 
Billing  (see  Sales) 
Bills  receivable  (see  Statement  </. 

Condition) 
Bond  and  mortgage  account 

(ledger)  42,  48,  81,  99,  122,  139 

Bonded  indebtedness  171 


311 


312 


INDEX 


BOOKKEEPING 

-  axiom  25 

-  books  required  for  double  entry    30 

-  books  used  in  single  entry  27 

-  "business"  accounts  29 

-  by  machinery  111 

-  capital  transactions  40 
-cash  book,  30,  31,  36,  39,  40, 

41,  46,  50,  131,  288 

-  change  in  methods  25 

-  closing  the  bdoks  142  to  155 

-  closing  too  frequently  145 

-  day  book  36,  37 

-  debit  and  credit  defined  30 
-difference  between  double  and 

single  entry  27,  33 

-  double  entry  25,  27 

-  essentials  25  to  37 

-  example  of  double  entry  31,  32 

-  furniture  and  fixtures  register        35 

-  how  it  differs  from  accounting         1 

-  journal,  30,  31,  32,  36,  39,  41, 

45,  161 

-  ledger,  30  to  37,  39,  42,  43,  44, 

46,  80,  81,  98  to  101,  121  to 
124,   137  to   141,   145,   160, 

161,  162,  288 
-looseleaf  111,  145 

-  merchandise  account  34 

-  modern  closing  of  accounts  145 

-  public  service  corporation's  6 

-  purpose  of  142 

-  retail  280  to  304 

-  single  entry  27  to  29 

-  starting  out  38  to  50 

-  subsidiary  ledgers  34 

-  trial  balance,  32,  34.  44,  50,  82, 

101,  125,  141,  145,  146 

-  when  to  debit  and  when  to  credit  29 
Breakage  as  selling  expense  107 
Buildings  and  equipment  account 

(ledger)  43,  46,  80,  98,  122,  137 

Burden  (see  Overhead) 

BUYING 

-  and  paying,  coordinating  83 

-  basic  principles  53 

-  charge  register  71  to  79 

-  comparat  ive  cost  figures  54 

-  coordination  between  stock  and 

purchasing  department  55 

-  faults  in  52 

-  follow-up  67,  68 

-  form  2S9 

-  importance  of  checking  receipts     68 

-  invoice  poster  290 

-  lorses  51 

-  methods  of  two  buyers  52 

-  need  for  good  methods  51 

-  order  forms  67  to  70 

-  performance  record  66 
-quotation  lists  64,65 

-  receiving  goods  71 


-record  of  purchases  for  future 
delivery  65,  66 

-  regulating  amount  of  stock  56 

-  requisites  of  good  system  55 

-  requisition  svstem  71 

-  retail  289 

-  supplies  70,  71 
-what  exact  knowledge  accom- 
plishes 54 


CAPITAL  STOCK 

-  authorized,    account     (ledger), 

49,  82,  99,  122,  137 

-  theory  of  170,  171 

-  unissued,  account  Oedger) 

48,  81,  99,  121,  137 

-  what  it  is  170 
Capital  transactions,  where  to  enter    40 

CASH 

-  account  (ledger)  43,  46,  80 

-  autograph  system  133,  134 

-  book  (see  Bookkeeping) 

-  collection  sheet  132 

-  discount,  account  (ledger) 

101,  124,  141 

-  discounts  (see  Accounts  Payable) 

-  five  sources  of  126 

-  handling  126  to  141 

-  in  bank,  account  (ledger)  138 

-  on  hand,  account  Gedger)       98,  122 

-  receipt  book  132 

-  receipt  record  131,  132 

-  receipts  133 

-  receipts,  retail  295,  297 
-register  133 

-  surrender  value  of  life  insurance 

policies  168 

-  trade  acceptances  126  to  128 
-"traveler"  sheet  133 

-  (see  also  Statement  of  Condition) 

CHECK 

-  paying  by  (see  Accounts  Pay- 

able) (see  also  Payroll) 

-  protection  89 

COLLECTIONS 

-  collector's  receipt  136 

-  entering  receipts  136 

-  handling  128  to  132 

-  loss  through  inaccuracy  135 

-  mail  135 

-  sheet  132 
-small,  disputed  amounts  129,  130 

-  two  cl  135 
Consignment  account  164 
Contingent  liability  149 
Contracts,  material  value  of  148,  149 

COSTS 
-by  standardization  264 

-  checking  into  general  books         274 


INDEX 


313 


-  departmental  cost  sheet  246 

-  expense,  reduced  to  unit  basis        18 

-  forms  of  cost  sheets  220  to  222 

-  freight,  necessity  for  knowing        20 

-  fundamentals  of  215 
-labor                           215,  232  to  241 

-  labor,  reduced  to  unit  basis  18 

-  losses  or  wastes  222  to  228 

-  manufacturing 

-  finished  goods  276 

-  parts  in  process  276 
-material                     215,  219  to  231 

-  necessity  for  checking  273 

-  of  finished  goods  152 

-  of  goods  in  process  151 

-  of  goods  in  statement  of  opera- 

tion 204 

-  overhead  215,  242  to  267 
-piece-work   system  to  measure 

labor  18 

-  retail  285,  286 

-  scrap  228  to  230 

-  sheets  219 

-  why  exact  are  needed  211 

COST  SYSTEMS 

-  as  aid  to  better  business  214 

-  choosing  the  right  214 
-complicated  211 

-  dangers  212 

-  for  small  business  213 

-  function  of  274 

-  need  for  one  suited  to  the  busi- 

ness 212 

-what  accurate  can  do  for  you 

217,  218 
CREDIT 

-  definition  of  30 
-memorandum                          109,110 

-  when  to  29 


Day  book  (see  Bookkeeping) 

T\T7*T>TrP 

DEBIl 

-  definition  of 

30 

-  when  to 

29 

DEPRECIATION 

-  arbitrary  percentages 

193 

-  basis  for 

195 

-  buildings 

198 

-  emotional 

194 

-  equipment 

192 

-  how  to  charge  off 

192  to  199 

in  statement  of  operation  207 

-  obsolescence  195 

-  old  installations  196 

-  operating  worth  193 

-  plant  ledger  196,  197 

-  real  estate  199 

-  reserve  160 


-  procedure  for  handling, 

160  to  162 
-  structural  types  198 

Dividends,  in  statement  of  opera- 
tion 208 


EXPENSE 
-account  (ledger) 

42,  81,  100,  124,  140,  149 

-  administrative  208 

-  advertising  270  to  272 

-  analysis  19 

-  analysis,  retail  301 

-  departmental  report  18 

-  jobbing  305,  306 

-  manufacturing  205,  275 

-  reports  that  show  extravagance    20 

-  sales  106  to  108,  208 

-  selling 

-  collecting  268 

-  distribution  of  272 

-  division  in  charge  register      276 

-  packing  and  shipping  269 

-  subsidiary  divisions  of  269 

-  what  it  is  268 

-  (see  also  Costs) 

-  (see  also  Overhead) 


Federal  Trade  Commission,  investi- 
gation made  by  10 

Furniture  and  fixtures  account 

(ledger)  43,  47,  80,  99,  122,  138 


GOOD  WILL 

-  as  an  asset  183 

-  capitalization  value  of  187 

-  court  rules  184,  185 

-  definition  of  184 

-  forms  for  appraisal  of  188,  1S9 

-  how  calculated  in  accountancy 

185,  186 

-  in  statement  of  condition      190,  191 
-fife  of  186 

-  trade  name  184 


GOODS  IN  PROCESS 
-  progress  sheets 


-  value  of 


151 
151 


I 


how  to  carry 


172 


INSURANCE 

-  cash  surrender  value  168 

-  fire  premiums  169 

INTEREST 
-account  (ledger) 

49,  81, 101, 124, 140 


314 


INDEX 


-  accrued,  account  (ledger) 

48,  82,  100,  123,  139 

-  on  investment,  account  (ledger)     42 

INVENTORY 

-  at  cost  149,  150 

-  consignment  account  164 

-  figures  of  Specialty  Company 

152  to  155 
-perpetual  61,147,148 

-  relation  of  to  profits  147 


Jobbing  (see  Accounting) 
Journal  (see  Bookkeeping) 


LABOR 

-  cost  215 

-  cost  report  19 

-  departmental  payroll  240,  241 

-  direct,  charging  234,  235 

-  efficiency,   percentages  by  de- 

partments 18 

-  non-productive      205,  232,  238,  239 

-  operation  cost  card  236 

-  paying  232  to  234 

-  productive  205,  232 

-  records  235  to  237 

-  timekeeping       235  to  237,  239,  240 
Ledger  (see  Bookkeeping) 

LIABILITIES 

-  contingent  173 

-  current  159,  171 

-  fixed  159 

M 

Machinery,  when  it  is  economical      262 

.MATERIALS 
-and  supplies,  account  (ledger) 

43,  47,  80,  99,  123,  140 

-  cost  215 

-  cost  sheets  220  to  222 

-  how  to  charge  219 

-  losses  or  wastes  222 

-  overhead  263 
Maturity  file  (see  Accounts  Payable) 

MERCHANDISE 


-  account  (see  Bookkeeping) 

-  how  valued 

N 


178 


173 


Net  worth,  how  ascertained 
NOTES  PAYABLE 

-  account  (ledger)  139 

-  (see  also  Statement  of  Condition) 


NOTES  RECEIVABLE 

-  account  (ledger)  139 

-  how  they  appear  in  the  state- 

ment of  condition  167 


Obsolescence  (see  Depreciation) 
Other  income,  account  (ledger)  141 

OVERACCOUNTING 

-  danger  of  2 

-  how  a  coal  dealer  was  dissuaded 

from  6 

-instances  of  2,  3 

OVERHEAD 

-  abnormal  conditions  265,  266 

-  administrative  expense  255 

-  apportioning  expense  254 

-  charging  258 

-  contributory  expense  248 

-  definition  of  243 

-  departmental  basis  245,  246 

-  departmental  cost  sheet  246  to  248 

-  distribution  of  242 

-  divisions  of  244 

-  expense  analysis  249,  250 

-  expense  divisions  252,  253 

-  false  methods  of  distribution 

255,  256 

-  fixed  charges  244,  245 
how  to  apportion  216 
"labor  dollar"  charge  259,  261 

-  machine  hour  plan  260 

-  material  263,  264 

-  of  man  who  sells  service  281 

-  pound  or  yard  basis  256  to  258 

-  power  expense  251,  252 

-  production  center  258,  259 

-  production  expense  248 

-  productive  hour  method  258,  260 

-  retail  299 

-  sources  242 


Packing  as  selling  expense  160 

Partnership,  recording  accountancy 
facts  of  40 

PAYROLL 

-  account  (ledger) 

42,  49,  81, 100,  124,  140 

-  form  of  check  93,  94 

-  methods  of  payment  91 

-  moving-picture  company's 

method  92, 93 

-  protection  against  dishonesty        92 

-  sheet  93  to  97 

-  two  phases  91 

-  (see  also  Labor) 

Petty  cash  account  (ledger)  138 


INDEX 


315 


PLANNING 

-facilitated  by  good  accounting 
system  23 

-  how  it  may  increase  profits  23 

-  that  increased  the  rate  of  turn- 

over 23 

PRICE 

-  of  raw  material,  fluctuating 


-  rules  for  values 


150 
148 


PRICE  CUTTING 

-  danger    of,    without    accurate 

cost  system  13 

-encouraged    by    ignorance  of 

costs  14 

PROFIT  OR  LOSS  STATEMENT 

-departmental  18 

-  manufacturer's  inadequate  16,  17 

-  retail  302 

-  that  shows  up  inefficiency  19 

-  unit  basis  17 

PROFITS 

-  a  matter  of  guess  15 

-  ascertaining  143  to  155 

-  exact  knowledge  of  13 

-  fair  margin  of  10 

-  how    knowledge    of    costs  in- 

creased 103 

-  localizing  144 

-  manufacturing  207 

-  on  individual  sale  103 

-  relation  of  inventory  to  147 
Purchasing  (see  Buying) 


Real  estate,  depreciation  of  199 

Rent,  how  charged  206 

Reports  for  the  executive        307  to  309 
Reserve  for  depreciation  of  truck- 
ing equipment,  account  (ledger) 

160,  162 
Retailing  (see  Accounting) 
Roller  autograph  register  (see  Cash) 


SALES 

-  account  (ledger)  124,  141 

-  accounting 

-  how  it  helps  102  to  125 

-  testing  accuracy  of  113 

-  unit  of  sale  103 
-billing  112 
-book  113,114 

-  cash  by  cash  register  114 

-  commission  agent  104 

-  commission  merchant  105,115 

-  credit  memorandum  109,  110 

-  expense  106  to  108,  268  to  272 


-  allowances  108 

-  breakage  107 
-deductions  108 

-  packing  106 

-  reports  278 
-gross 

-in  statement  of  operation  203 

-  ratio  to  capital  investment     1 1 

-  marketing  divisions  104 

-  recording  by  machinery        110,  111 

-  records  of  retail  293,  294 

-  register  288 

-  selling  agent  104,  105 

-  simplifying  records  113 

-  through  jobber  104,115 

SALESMEN 

-  commissions  104 

-  commissions  on  sliding  scale         270 

-  correspondence  with  119 

-  rating  269,  270 

-  relation  to  profits  118 
-reports                        115  to  118,  120 

-  salaries  268 
Sabers,  Professor  E.  A.,  article  on 

trade  acceptance  126 

SCRAP 

-  how  to  charge  228  to  230 

-  salvaging  230 

SECURITIES  OWNED 

-  amortization  of  163 

-  how  to  enter  163 

-  what  they  consist  of  163 
Service,  accountancy  for  man  who 

sells  280  to  284 

SINKING  FUND 

-  how  it  appears  on  the  books        164 

-  what  it  is  164 
Specialty     Company,     accounting 

methods,  39  to  50,  79  to  82,  98  to 
101,  121  to  125,  136  to  141,  146, 

147,  152  to  155 

STATEMENT  OF  CONDITION 

-  acceptances  168 

-  accounts  payable  180,  181 

-  accounts  receivable       166,  176,  177 

-  accounts  receivable  in  suspense  167 
-accruals                                  171,  172 

-  assets,  two  classes  of  159 

-  bills  receivable  177 

-  bonded  indebtedness  171 

-  buildings  178 

-  capital  stock  170,  171 

-  cash  on  hand  176 
-cash  surrender  value  of  life  in- 
surance policy  168 

-  cash,  what  to  include  under  165 

-  contingent  liabilities  173 

-  current  liabilities  171 


316 


INDEX 


-  deferred  assets  168 

-  definition  of  156 

-  depreciation  reserve  160  to  162 

-  establishing  a  discount  line  175,  176 

-  fire  insurance  premiums  169 

-  fixed  assets,  definition  of  159 

-  good  will  190,  191 

-  how  bankers  analyze         174  to  182 

-  individual  or  partnership  158 

-  liabilities,  two  classes  of  159 

-  merchandise  178 
-need  for  156 

-  neglect  of,  grounds  for  suspicion  157 

-  net  worth  173 

-  notes  payable  179,180 

-  notes  receivable  167 
-petty  cash                              165,166 

-  plant  and  equipment  179 

-  prepaid  operating  expenses  169,  170 


-  purposes  it  serves 

-  real  estate 

-  reserves 

-  securities  owned 

-  sinking  fund 

-  stock  turnover 

-  surplus 

-  surveys  of 

-  treasury  holdings 

-  usual  form 

-  what  one  showed 


156 

178 

172 

163, 164 

164 

178 

173 

174,  175 

162,  163 

158 

157 


STATEMENT  OF  OPERATION 

-  allowance  203 

-  cash  discount  208 

-  cost  of  goods  sold  204,  205 
-deductions  203,209 

-  depreciation  207 

-  derivation  202 

-  dividends  208 

-  expense 

-  administrative  208 

—  selling  208 

-  factory  supplies  205 

-  for  the  banker  201 
-forms                             202,  Insert  X 

-  freight  outward  203 

-  gross  sales  203 

-  heat  and  light  207 

-  insurance  206 

-  manufacturing  expense  205 

-  manufacturing  profit  207 

-  only  a  substitute  for  cost  system  201 

-  other  income  208 

-  power  207 
-rent  206 

-  repairs  and  renewals  207 

-  return  sales  203 

-  simplest  form  201 
-taxes    ,  206 

-  trade  discount  204 
-value  of  201 

-  what  it  is  200 
-what  it  shows  200,201 


STATEMENTS 

-  how  often  to  make  277 
Statistics,  ratio  of  sales  to  capital 

investment  11 

STOCK 

-  check  on  errors  61 

-  how  to  fix  maximum  and  mini- 

mum 56,  57 

-  how  to  record  sale  of  45 
-records  59  to  62 
-room 

-  carelessness  in  the  58,  59 

-  controlling  57 

-  effect  on  turnover  55 

-  indigestion  of  the  58 

-  shortage  report  63,  64 
Surplus  173 

SYSTEMS  OF  ACCOUNTING 

-  changing  gradually  7 

-  chemical  company's  7 

-  coal  operator's  inadequate  15 

-  danger  of  thrusting  in  new  4 

-  fitting  to  your  business  3  to  9 

-  how  they  permit  planning  22 

-  new,  that  effected  economies  20 

-  personal  equation  4 

-  ready-made  8 

-  retail  coal  dealer's  5 

-  the  best  7 


Taxes,  theories  of  206 

Timekeeping  (see  Labor) 

TRADE  ACCEPTANCES 

-  article  by  Professor  Saliers  126 

-  distinguishing    between    notes 

and  127 

-  how  they  appear  on  the  state- 

ment of  condition  168 

-  how  to  charge  127,  128 
Treasury  holdings,  what  they  are 

162,  163 
Trial  balance  (see  Bookkeeping) 
Trucking  equipment  account 

(ledger)  160,  161 

TURNOVER 

-  average  in  retail  stores 


-  definition  of 

-  increasing 

-  retail 

-  stock 


12 
11 

288 
287 
178 


w 


Washburn  vs.  National  Wall  Paper 
Company  183 

WASTE 

-  of  materials  222  to  228 

-  plans  to  reduce  226  to  228 

-  standardization  to  prevent   225,  226 


II:  I!1    I  III  111  II I II I II  III  111  111  III 
A     000  188  807     2 


Library 

Graduate  School  of  Business  Administration 

University  of  California 

Los  Angelt--        -urnia 


VINc  LISHaAINP 


EXPENSE  ANALYSIS 

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